Ontario, Inc. manufactures two products, Standard and Enhanced, and applies over
ID: 2356583 • Letter: O
Question
Ontario, Inc. manufactures two products, Standard and Enhanced, and applies overhead on the basis of direct-labor hours. Anticipated overhead and direct-labor time for the upcoming accounting period are $800,000 and 25,000 hours, respectively. Information about the company’s products follows.Standard:
Estimated production volume, 3,000 units
Direct-material cost, $25 per unit
Direct labor per unit, 3 hours at $12 per hour
Enhanced:
Estimated production volume, 4,000 units
Direct-material cost, $40 per unit
Direct labor per unit, 4 hours at $12 per hour
Ontario’s overhead of $800,000 can be identified with three major activities: order processing ($150,000), machine processing ($560,000), and product inspection ($90,000). These activities are driven by number of orders processed, machine hours worked, and inspection hours, respectively. Data relevant to these activities follow.
Orders
Processed Machine Hours
Worked Inspection
Hours
Standard 300 18,000 2,000
Enhanced 200 22,000 8,000
Total 500 40,000 10,000
Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in income is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed—machinery that was expected to produce significant operating efficiencies.
Assuming use of activity-based costing, compute the unit manufacturing costs of the Standard and Enhanced products if the expected manufacturing volume is attained
How do i go about solving this problem?
Explanation / Answer
You need to apply the overhead in this situation based on the activities, which are order processing, machine processing, and product inspection.
To figure out how much to apply, you need to find the rate.
Since order processing is driven by number of orders processed, you would take the costs for order processing (150,000) and divide by the number of orders processed (500). This is $300 per order processed.
So the amount of order processing costs applied to Standard would be 300*300 = 90,000. The amount applied to enhanced would be 200*300 = 60,000.
You would do the same to the other two activities:
Machine processing costs/machine hours worked = 560,000/40,000 = $14 per machine hour worked. Machine hours worked applied to standard = 18,000*14 = 252,000. Machine hours worked applied to enhanced = 22,000*14 = 308,000
Product inspection costs/Inspection hours = 90,000/10,000 = $9 per inspection hour. Inspection costs applied to standard = 2,000*9 = 18,000. Inspection costs applied to enhanced = 8,000*9 = 72,000
Total overhead applied to standard = 90,000 + 252,000 + 18,000 = 360,000. Divide by 3000 units = $120 per unit
Total overhead applied to enhanced = 60,000 + 308,000 + 72,000 = 440,000. Divide by 4000 units = $110 per unit
Now that you have the overhead per unit, you just need the materials and labor per unit:
Standard:
Direct-material cost, $25 per unit
Direct labor per unit, 3 hours at $12 per hour = $36 per unit
Overhead per unit = $120 per unit
Total manufacturing costs per unit for standard = $181 per unit
Enhanced:
Direct-material cost, $40 per unit
Direct labor per unit, 4 hours at $12 per hour = $48 per unit
Overhead per unit = $110 per unit
Total manufacturing costs per unit for enhanced = $198 per unit
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