A Contrasting ABC and Conventional Product Costs [LO2, LO3, LO4]
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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 hour 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:
LEC 40 LEC 90
Direct materials $ 25.00 $ 44.00
Direct labor (0.20 hours and 0.60 hours @ $ 20.00 per hour)$ 4 $ 12
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 2
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:
Activity Cost Pool Activity Measure Estimated
Overhead Cost
Maintaining parts inventory Number of part types $ 392,000
Processing purchase orders Number of purchase orders $ 100,000
Quality control Number of tests run $ 115,500
Machine-related Machine-hours $ 416,500
$ 1,024,000
Expected Activity
Activity Measure LEC 40 LEC 90 Total
Number of part types 1,000 1,800 2,800
Number of purchase orders 1,400 600 2,000
Number of tests run 1,900 1,950 3,850
Machine-hours 4,000 6,000 10,000
Determine the activity rate for each of the four activity cost pools. (Round your answers to 2 decimal places.)
Activity Cost Pool Activity Rate
Maintaining inventory $ 140 per part type
Processing purchase orders $50 per order
Quality control $ 30 per test
Machine-related $ 41.65 per MH
Problem 3-16A Part 3
3. Using the activity rates you computed in part (2) above, do the following:
a. Determine the total amount of manufacturing overhead cost that would be assigned to each product using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each product. (Do not round intermediate calculations. Round your final answers to 2 decimal places.)
Manufacturing overhead per unit of LEC 40 $
Manufacturing overhead per unit of LEC 90 $
b. Compute the unit product cost of each product. (Do not round intermediate calculations. Round your final answers to 2 decimal places)
Unit product cost for LEC 40 $
Unit product cost for LEC 90 $