Reference no: EM132565403
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 $25.08, and the current cost to produce gears is $14.14. 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) $16.55 $7.88
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 $60,000
Machine cost 350,000
Purchasing and receiving costs 210,000
Engineering costs 200,000
Materials handling costs 90,000
Total $910,000
Question a. Calculate LaMesa's current company-wide overhead rate based on direct labor hours.
Question b. Verify LaMesa's calculation of overhead cost per unit of $16.55 for shafts and $7.88 for gears.
Use rounded rate calculated above. Round per unit rate to two decimal places.
Rate X Hours = Overhead ÷ Units = Per Unit Shafts:
Question 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.