Reference no: EM133561094

The following estimates are available for a manufacturing company for their upcoming year.
Estimated manufacturing overhead
Product engineering $160,000
Production machine setup $200,000
Production machine depreciation $450,000
Other overhead $350,000
$1,160,000
Estimated overhead activities
Number of product engineering hours 4,400
Number of machine setups 100
Number of machine-hours 18,000
Number of direct labor hours 25,000
The following information is available for production runs for two products, product 1 and
product 2.
Product 1 Product 2
Selling price per unit $23 $26
Number of units produced 5000 500
Total direct material cost $60,000 $6,000
Total direct labor cost $14,400 $1,440
Number of product engineering hours 100 100
Number of machine setups 1 1
Number of machine-hours 200 20
Number of direct labor hours 800 80
The company uses a traditional overhead allocation system. Manufacturing overhead is
allocated based on direct labor hours.
The sales manager for the company has submitted a proposal to shift the marketing focus to
low-volume products such as product 2. The proposal was prompted by the higher markups that
can be charged for these products without customer complaint. The company president is
concerned that the company's cost per unit may be sending the wrong message. He recently
learned of activity-based costing and wonders if it might help.
Assume that you are part of a group that has been assigned to review the situation.

Required:

a) Determine the per-unit cost for product 1 and product 2 using direct labor hours as the allocation base for all manufacturing overhead costs.

b) Determine the per-unit cost for product 1 and product 2 using activity-based costing to allocate manufacturing overhead costs. (Note: allocate other overhead costs based on direct labor hours.)