Artic Company manufactures two products, the Arc and the Ic. The company estimated it would incur $130,890 in manufacturing overhead costs during the current period. Overhead currently is assigned to products on the basis of direct labor hours. Data concerning the current period's operations appear below:
Arc Ic
- Estimated volume 400 units 1,200 units
- Direct labor hours per unit 0.70 hour 1.20 hours
- Direct material cost per unit $10.70 $16.70
- Direct labor cost per unit $11.20 $19.20
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 three activity pools:
Activity Cost Pool Activity Measure Overhead Cost
- Machine Setups Number of setups $13,570
- Purchase Orders Number of purchase orders $91,520
- General Factory Direct labor hours $25,800
Expected Activity
- Activity Cost Pool Arc Ic Total
- Number of setups 100 130 230
- Number of purchase orders 810 1,270 2,080
- Number of direct labor hours 280 1,440 1,720
Required:
1. Compute the predetermined overhead rate using the traditional method. Using this rate and the other data from the problem, calculate the unit product cost of both products.
2. Determine the activity rate (i.e,. predetermined overhead rate) for each of the cost pools.
3. Use the activity rates you calculated in (2.) above to:
a. Compute the total amount of manufacturing overhead cost that would be applied to each product using the activity-based costing system.
b. Then, determine the amount of manufacturing overhead cost per unit of each product.
c. Finally, compute the unit product cost of each product.