Problem 4-16 Contrasting ABC and Conventional Product Costs [LO4-2, LO4-3, LO4-4]

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For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.

Despite the growing popularity of the companys new LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the companys costing system. Direct material and direct labor costs per unit are as follows:

	LEC 40		LEC 90
Direct materials	$	26.00	$	42.00
Direct labor (0.20 hours and 0.60 hours @ $15.00 per hour)	$	3.00	$	9.00

Management estimates that the company will incur $848,000 in manufacturing overhead costs during the current year and 80,000 units of the LEC 40 and 40,000 units of the LEC 90 will be produced and sold.

Problem 4-16 Part 3

3. Using the activity rates you computed in part (2), do the following:

a. Determine the per unit amount of manufacturing overhead cost that would be assigned to each product using the activity-based costing system.

b. Compute the unit product cost of each product.

Activity rates

Maintaining inventory: $140 per part type

Processing purchase orders: $70 per order

Quality control: $10 per test

Machine-related: $44.25 per MH