Contrasting ABC and Conventional Product Costs Rocky Mountain Corporation makes

Question

Contrasting ABC and Conventional Product Costs

Rocky Mountain Corporation makes two types of hiking boots—Xactive and Pathbreaker, Data concerning these two product lines appear below:

Xactive

Pathbreaker

Direct materials per unit

$64.80

$51.00

Direct labor costs per unit

$18.20

$13.00

Direct labor -hours per unit

1.4 DLHs

1.0 DLHs

Estimated annual production and sales

25,000 units

75,000 units

The company has a conventional costing system in which manufacturing overhead is applied to units based on direct labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:

               Estimated total manufacturing overhead_____________$2,200,000

Required:

1.Compute the predetermined overhead rate based on direct labor-hours. Using this rate and other data from the problem, determine the unit product cost of each product.

2.The company is considering replacing its conventional costing system with an activity-based costing system that would assign its manufacturing overhead to the following four activity cost pools

                                                                                                                    Expected activity_____

                                                                        Estimated          

Activities and activity Measures        Overhead Cost       Xactive     Pathbreaker       Total

Supporting direct labor (direct              $797,500               36,000         75,000          110,000

                               Labor -hours)

Batch setups(setups)                                 680,000                    250              150                  400

Product sustaining (number of

                                    Products)                 650,000                         1                    1                     2

General Factory (machine-hours)              72,000                 2,500           7,500            10,000

Total Manufacturing overhead

                                               Cost             $2,200,000

Xactive

Pathbreaker

Direct materials per unit

$64.80

$51.00

Direct labor costs per unit

$18.20

$13.00

Direct labor -hours per unit

1.4 DLHs

1.0 DLHs

Estimated annual production and sales

25,000 units

75,000 units

Explanation / Answer

1) Predetermined Overhead Rate ;-

= Estimated total manufacturing Overhead cost / Estimated total direct labor hours

= $2200000 / 110000 h

= $20 per hour

Estimated Total Direct Labor Hours :-

= (25000 units * 1.4 h per unit) + (75000 units * 1 h per unit)

= 35000 h + 75000 h

= 110000 hours

2) Total Manufacturing Overhead Cost :-

Activities and Activity Measures Cost Driver Estimated Overhead Cost ($) Expected Activity Acticity Rate Supporting direct labor (Direct Labor Hours) Direct Labor Hours 797500 110000 $7.25 per Labor Hour Batch Setup Set ups 680000 400 $1700 Per Set Up Product Sustaining No. of Products 650000 2 $325000 Per Product General Factory Machine hours 72500 10000 $7.25 Per Machine Hour

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