Reference no: EM131796806

Assignment

Problem 1

Activity-Based Absorption Costing as an Alternative to Traditional Product Costing

Siegel Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company's profits have steadily declined and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.

Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $6,306,150 in manufacturing overhead cost and produce 22,000 units of the deluxe model and 120,000 units of the regular model. The deluxe model requires 1.0 hours of direct labor time per unit, and the regular model requires 0.5 hours. Material and labor costs per unit are as follows:

	Model
	Deluxe	Regular
Direct materials	158	112
Direct labor	18	9

Required:

1-a. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate.

1-b. Using the predetermined overhead rate computed in 1-a above and other data from the problem, determine the unit product cost of each model.

2. Management is considering using activity-based absorption costing to apply manufacturing overhead cost to products. The activity-based costing system would have the following four activity cost pools:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost
Purchasing	Purchase orders issued	263,250
Processing	Machine-hours	4,012,500
Scrap/rework	Scrap/rework orders issued	734,400
Shipping	Number of shipments	1,296,000
		6,306,150

	Expected Activity
Activity Measure	Deluxe	Regular	Total
Purchase orders issued	450	900	1,350
Machine-hours	21,400	32,100	53,500
Scrap/rework orders issued	600	480	1,080
Number of shipments	6,480	9,720	16,200

Determine the predetermined overhead rate for each of the four activity cost pools.

3. Using the predetermined overhead rates computed in part (2), do the following:

a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based absorption costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.

b. Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead).