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Precision Manufacturing Inc. (PMI) makes two types of industrial component parts-the EX300 and the TX500. It annually produces 65,000 units of EX300 and 13,000 units of TX500. The companys conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the companys two product lines is shown below: EX300 TX500 Total Direct $371,325 $167,550 $538,875 materials Direct labor $125,000 $ 45,000 $170,000 The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below Activity Manufacturing TX500 Activity Cost Pool Machining (machine-s Setups (setup hours) Total (and Activity Measure) OverheadEX300 248,000 95,000 65,000 160,000 450 2 45,000 $170,000 hours) 202,500 350 100 Product-level 88,400 (number of products) General factory 73,100 $125,000 (direct labor dollars) 612,000 Total manufacturing s overhead cost Required 1- Compute the plantwide overhead rate that would be used in the a. companys conventional cost system. (Round your answer to 2 decimal places.) Predetermined overhead rate per DLS 1- b. Using the plantwide rate, compute the unit product cost for each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.) EX300 TX500 Unit product cost
Precision Manufacturing Inc. (PMI) makes two types of industrial component parts-the EX300 and the TX500. It annually produces 65,000 units of EX300 and 13,000 units of TX500. The company’s conventional cost system allocates manufacturing overhead to products using a plantwide overhead rate and direct labor dollars as the allocation base. Additional information relating to the company’s two product lines is shown below: EX300 TX500 Total Direct $371,325 $167,550 $538,875 materials Direct labor $125,000 $ 45,000 $170,000 The company is considering implementing an activity-based costing system that distributes all of its manufacturing overhead to four activities as shown below Activity Manufacturing TX500 Activity Cost Pool Machining (machine-s Setups (setup hours) Total (and Activity Measure) OverheadEX300 248,000 95,000 65,000 160,000 450 2 45,000 $170,000 hours) 202,500 350 100 Product-level 88,400 (number of products) General factory 73,100 $125,000 (direct labor dollars) 612,000 Total manufacturing s overhead cost Required 1- Compute the plantwide overhead rate that would be used in the a. company’s conventional cost system. (Round your answer to 2 decimal places.) Predetermined overhead rate per DLS 1- b. Using the plantwide rate, compute the unit product cost for each product. (Do not round intermediate calculations. Round your answers to 2 decimal places.) EX300 TX500 Unit product cost
Expert Answer
Solution:
1-a) – Plantwide Overhead rate
– Overhead Rate is the rate which is used to apply manufacturing overhead to products or job orders.
– Normally, it is calculated at the beginning of the period.
– It is calculated by dividing the estimated factory overhead cost by an allocation base (or suitable basis).
– Allocation bases may be direct labor hours, direct labor costs, machine hours etc..
Overhead Rate = Estimated Manufacturing Overhead Cost / Estimated Allocation Base
Plant-wide overhead rate means predetermined overhead rate of plant as a whole.
Here,
Allocation Base = Direct labor dollars
Total Direct Labor Dollars = $170,000
Total Manufacturing Overhead Costs = $612,000
Plantwide Overhead Rate = Total Manufacturing Overhead Costs $612,000 / Total Direct Labor Dollars $170,000
= $3.6 per DL $
1-b) Unit Product Cost for each product
| EX300 | TX500 | |
| Direct materials | 371,325 | $167,550 |
| Direct labor | 125,000 | $45,000 |
| Allocated manufacturing overhead cost
(direct labor cost * 3.6) |
450,000 | 162,000 |
| Total manufacturing costs | 946,325 | 374,550 |
| Units Produced | 65,000 Units | 13,000 Units |
| Unit Product Cost
(Total Manufacturing Cost / Units Produced) |
$14.56 | $28.81 |
2-a) Activity Rate for each activity cost pool
| Activity | Manufacturing OH | Total Activity Performed | Cost per Activity | ||
| Matching | 248,000 | 160000 | MH | $1.55 | Per MH |
| Setups | 202,500 | 450 | Setup hours | $450.00 | Per Setup hour |
| Product Level | 88,400 | 2 | Number of product | $44,200.00 | Per Product |
| General factory | 73,100 | $170,000 | Direct labor dollar | $0.43 | Per DH$ |
| 612,000 | |||||
2-b) Unit Product Cost using activity rates
| EX300 | TX500 | |
| Direct materials | $371,325 | $167,550 |
| Direct labor | $125,000 | $45,000 |
| Manufacturing overhead cost (Refer note 1) | $290,200 | $321,800 |
| Total manufacturing costs | $786,525 | $534,350 |
| Units Produced | 65,000 Units | 13,000 Units |
| Unit Product Cost (Total Manufacturing Cost / Units Produced) | $12.10 | $41.10 |
Note 1 – Allocated Manufacturing Overheads based on activities performed
For EX300
| Activity | Activity Performed in EX300 | Activity Rate | Total allocated cost |
| Matching | 95,000 | $1.55 | $147,250 |
| Setups | 100 | $450.00 | $45,000 |
| Product Level | 1 | $44,200.00 | $44,200 |
| General factory | 125,000 | $0.43 | $53,750 |
| Total | $290,200 |
FOR TX500
| Activity | Activity Performed in TX500 | Activity Rate | Total allocated cost |
| Matching | 65,000 | $1.55 | $100,750 |
| Setups | 350 | $450.00 | $157,500 |
| Product Level | 1 | $44,200.00 | $44,200 |
| General factory | 45,000 | $0.43 | $19,350 |
| Total | $321,800 |
