For many years, Zapro Company manufactured a single product called a mono-relay. Then three years ago, the company automated a portion of its plant and at the same time introduced a second product called a bi-relay that has become increasingly popular. The bi-relay is a more complex product, requiring one hour of direct labor time per unit to manufacture and extensive machining in the automated portion of the plant. The mono-relay requires only 0.75 hour 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 bi-relay, profits have been declining steadily. Management is beginning to believe that there may be a problem with the company's costing system. Material and labor costs per unit are as follows
- Mono-Relay Bi-Relay
- Direct materials $ 32 $ 56
- Direct labor (0.75 hours @ $12 per hour and
- 1.0 hours @ $12 per hour)
- $ 9 $ 12
Management estimates that the company will incur $908,000 in manufacturing overhead costs during the current year and 40,000 units of the mono-relay and 10,000 units of the bi-relay will be produced and sold.
Requirement 1:
Compute the predetermined manufacturing overhead rate assuming that the company continues to apply manufacturing overhead cost on the basis of direct labor-hours. Using this rate and other data from the problem, determine the unit product cost of each product. (Round your answer to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)
- Predetermined manufacturing overhead rate $ per DLH
- Unit product cost of Mono-Relay $
- Unit product cost of Bi-Relay $
Requirement 2:
Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. 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 $ 228,000
- Processing purchase orders Number of purchase orders 180,000
- Quality control Number of tests run 40,000
- Machine related Machine-hours 460,000
- Expected Activity
- Activity Measure Mono-Relay Bi-Relay Total
- Number of part types 75 150 225
- Number of purchase orders 800 200 1,000
- Number of tests run 2,500 3,250 5,750
- Machine-hours 4,000 6,000 10,000
Determine the activity rate (i.e., predetermined overhead rate) for each of the four activity cost pools. (Round your answer to 2 decimal places. Omit the "tiny_mce_markerquot; sign in your response.)
- Activity Cost Pool Activity Rate
- Maintaining inventory $ per part type
- Processing purchase orders $ per order
- Quality control $ per test
- Machine-related $ per MH
Requirement 3:
Using the activity rates you computed in Requirement 2 above, do the following
(a) Determine the total amount of manufacturing overhead cost that would be applied 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.
Overhead per unit of Mono-Relay $
Overhead per unit of Bi-Relay $
(b) Compute the unit product cost of each product.
- Unit product cost for Mono-Relay $
- Unit product cost for Bi-Relay $