Problem 3-16A Contrasting ABC and Conventional Product Costs [LO3-2, LO3-3, LO3-
ID: 2493036 • Letter: P
Question
Problem 3-16A Contrasting ABC and Conventional Product Costs [LO3-2, LO3-3, LO3-4]
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For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.
Despite the growing popularity of the company’s new LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Direct material and direct labor costs per unit are as follows:
Management estimates that the company will incur $1,024,000 in manufacturing overhead costs during the current year and 80,000 units of the LEC 40 and 40,000 units of the LEC 90 will be produced and sold.
Problem 3-16A Part 1
Compute the predetermined overhead rate assuming that the company continues to apply manufacturing overhead cost on the basis of direct labor-hours. (Round your answer to 2 decimal places.)
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Using this rate and other data from the problem, determine the unit product cost of each product. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
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3.
Problem 3-16A Part 2
Management is considering using activity-based costing to assign manufacturing overhead cost to products. The activity-based costing system would have the following four activity cost pools:
LEC 40
LEC 90
Total
Determine the activity rate for each of the four activity cost pools. (Round your answers to 2 decimal places.)
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4.
Problem 3-16A Part 3
Determine the per unit amount of manufacturing overhead cost that would be assigned to each product using the activity-based costing system. (Do not round intermediate calculations. Round your answers to 2 decimal places.)
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Compute the unit product cost of each product. (Do not round intermediate calculations. Round your final answers to 2 decimal places)
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For many years, Thomson Company manufactured a single product called LEC 40. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called LEC 90 that has become increasingly popular. The LEC 90 is a more complex product, requiring 0.60 hours of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The LEC 40 requires only 0.20 hours of direct labor time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labor-hours.
Despite the growing popularity of the company’s new LEC 90, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company’s costing system. Direct material and direct labor costs per unit are as follows:
Explanation / Answer
1a.
Predetermined overhead rate = 1024000 / (0.2 * 80000 + 0.6 * 40000) = $25.60 per DLH
1b.
Pre unit cost: LEC40 = 25+4+(0.2 * 25.60) = $34.12
LEC90 = 44+12+(0.6 * 25.60) = $71.36
2.
Maintaining Inventory = 392000/2800 = $140 per part type
Processing Purchase orders = 100000/2000 = $50 per order
Quality Control = 115500/3850 = $30 per test
Machine related = 416500/10000 = $41.65 per MH
3.
Manufacturing overhead per unit = LEC40 = (1000*40+1400*50+1900*30+4000*41.65) / 80000 = $4.17 per unit
LEC90 = (1800*40+600*50+1950*30+6000*41.65) / 40000 = $10.26 per unit
4.
Pre unit cost: LEC40 = 25+4+4.17 = $33.17 per unit
LEC90 = 44+12+10.26 = $64.26 per unit
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