Asked by Jhane Hemingway on May 08, 2024
Verified
EMD Corporation manufactures two products, Product S and Product W. Product W is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product W. Product W is the more complex of the two products, requiring one hour of direct labor time per unit to manufacture compared to one-half hour of direct labor time for Product S. Product W is produced on an automated production line.Overhead is currently assigned to the products on the basis of direct-labor-hours. The company estimated it would incur $500,000 in manufacturing overhead costs and produce 10,000 units of Product W and 60,000 units of Product S during the current year. Unit cost for materials and direct labor are:
Required:a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:
Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.
Direct Labor
involves labor costs directly associated with the manufacturing of products, easily traceable to the end product.
Overhead Costs
Expenses related to the operation of a business that are not directly tied to a specific product or service, such as rent, utilities, and administrative expenses.
- Acquire a comprehension of the Activity-Based Costing (ABC) methodology.
- Assign overhead expenditures to goods using determined activity rates.
- Establish the profitability boundaries of products via ABC analytic methods.
Verified Answer
Using these hours as a base, the predetermined overhead using direct labor-hours would be:Predetermined overhead rate = Estimated total manufacturing overhead cost ÷ Estimated total amount of the allocation base =$500,000 ÷ 40,000 DLHs = $12.50 per DLHUsing this overhead rate, the unit product cost of each product would be:
b.The overhead rates are computed as follows:
The overhead cost charged to each product is:The overhead cost charged to Product S is:
Overhead cost per unit of Product S = $205,825 ÷ 60,000 units = $3.43 per unit (rounded)The overhead cost charged to Product W is:
Overhead cost per unit of Product W = $294,175 ÷ 10,000 units = $29.42 per unit (rounded)Using activity-based costing, the unit product cost of each product would be:
Learning Objectives
- Acquire a comprehension of the Activity-Based Costing (ABC) methodology.
- Assign overhead expenditures to goods using determined activity rates.
- Establish the profitability boundaries of products via ABC analytic methods.
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