Product Costing: Company-wide Overhead Versus ABC LaMesa produces machine parts as a contract provider for a large manufacturing company. LaMesa produces two particular parts, shafts and gears. The competition is keen among contract producers, and LaMesa's top management realizes how vulnerable its market is to cost-cutting competitors. Hence, having a very accurate understanding of costs is important to LaMesa's survival. LaMesa's president, Jose Rodriguez, has observed that the company's current cost to produce shafts is $26.94, and the current cost to produce gears is $15.03. He indicated to the controller that he suspects some problems with the cost system because LaMesa is suddenly experiencing extraordinary competition on shafts, but it seems to have a virtual corner on the gears market. He is even considering dropping the shaft line and converting the company to a one-product manufacturer of gears. He asked the controller, Felix Bernhardt, to conduct a thorough cost study and to consider whether changes in the cost system are necessary. The controller collected the following data about the company's costs and various manufacturing activities for the most recent month:

	Shafts	Gears
Production units	50,000	10,500
Selling price	$31.86	$24.00
Overhead per unit (based on direct labor hours)	$18.41	$8.77
Materials and direct labor cost per unit	$8.53	$6.26
Number of production runs	10	20
Number of purchasing and receiving orders processed	40	100
Number of machine hours	12,750	6,000
Number of direct labor hours	25,000	2,500
Number of engineering hours	5,000	5,000
Number of material moves	50	40

The controller was able to summarize the company's total manufacturing overhead into the following pools:

Setup costs	$75,000
Machine cost	437,500
Purchasing and receiving costs	210,000
Engineering costs	200,000
Materials handling costs	90,000
Total	$1,012,500

a. Calculate LaMesa's current company-wide overhead rate based on direct labor hours. Round rate to two decimal places. $Answer per direct labor hour b. Verify LaMesa's calculation of overhead cost per unit of $18.41 for shafts and $8.77 for gears. Use rounded rate calculated above. Round per unit rate to two decimal places.

	Rate	X	Hours	=	Overhead		Units	=	Per Unit
Shafts:
Gears:

c. Calculate the manufacturing overhead cost per unit for shafts and gears using activity-based costing, assuming each of the five cost pools represents a separate activity pool. Round answers to two decimal places, if needed.

Setup
Machine
Purchasing & receiving
Engineering
Materials handling

Use the most appropriate activity driver for assigning activity costs to the two products. Use rounded overhead rates calculated above for calculations below. Round cost answers to the nearest whole number, when needed. Round overhead cost per unit to two decimal places.

	Shafts	Gears
Setup
Machine
Purchasing
Engineering
Materials handling
Total ABC overhead cost
Number of units produced
Overhead cost per unit

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