For many years, Dover 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 which has become increasingly popular. The birelay is a more complex product, requiring two hours of direct labour time per unit to manufacture and extensive machining in the automated portion of the plant. The mono-relay requires only one hour of direct labour time per unit and only a small amount of machining. Manufacturing overhead costs are currently assigned to products on the basis of direct labour 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 labour costs per unit are as follows:
Mono- Relay Bi-Relay
Direct materials . . . . . . . . . . . . $35 $48
Direct labour($18 per hur)..........$18 $36
Management estimates that the company will incur $3,000,000 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.
Required 1. Compute the predetermined overhead rate assuming that the company continues to apply manufacturing overhead cost on the basis of direct labour-hours. Using this rate and other data from the problem, determine the unit product cost of each product.
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: Estimated Activity Cost Pool Activity Measure Overhead Cost
Maintaining parts inventory . . . . . . Number of part types $ 360,000
Processing purchase orders . . . . . . Number of purchase orders 540,000
Quality control . . . . . . . . . . . . . . . Number of tests run 600,000
Machine related . . . . . . . . . . . . . . . Machine-hours 1,500,000
Total overhead cost $3,000,000 Expected Activity
Activity Measure Mono-Relay Bi-Relay Total
Number of part types . . . . . . . . . . . 300 600 900
Number of purchase orders . . . . . . 2000 1000 3000
Number of tests run . . . . . . . . . . . . 2000 6000 8000
Machine-hours . . . . . . . . . . . . . . . 20,000 30,000 50,000
Using the simplified approach described at the end of the chapter, determine the predetermined overhead rate for each of the four activity cost pools.
3. Using the predetermined manufacturing overhead rates you computed in (2) above, do the following:
a. Compute 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.
b. Compute the unit product cost of each product.