Problem 4-17 (Algo) Contrast Activity-Based Costing and Conventional Product Costing [LO4-2, LO4-3, LO4-4]

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Puget World, Incorporated, manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow:

	Direct Labor- Hours per Unit	Annual Production	Total Direct Labor-Hours
Model N 800 XL	3.0	3,000 Units	9,000
Model N 500	1.4	15,000 Units	21,000
			Total: 30,000

Additional information about the company follows:

a. Model N 800 XL requires $90 in direct materials per unit, and Model N 500 requires $45.

b. The direct labor wage rate is $15 per hour.

c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products.

d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity-based costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Machine setups	Number of setups	$ 480,000
Special processing	Machine-hours	$225,000
General factory	Direct labor-hours	$1,815,000
		Total: $ 2,520,000

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Machine setups	Number of setups	$ 480,000
Special processing	Machine-hours	225,000
General factory	Direct labor-hours	1,815,000
		$ 2,520,000

Expected Activity
Activity Measure	Model N 800 XL	Model N 500	Total
Number of setups	160	240	400
Machine-hours	15,000	0	15,000
Direct labor-hours	9,000	21,000	30,000

Required:

1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.

a. Compute the predetermined overhead rate.

b. Compute the unit product cost of each model.