Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500...
Question:
Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow:
| Direct Labor-Hours per Unit | Annual Production | Total Direct Labor-Hours | |
|---|---|---|---|
| Model N 800 XL | 3.0 | 3,000 units | 9,000 |
| Model N 500 | 1.0 | 12,000 units | 12,000 |
| 21,000 |
Additional information about the company follows: a
- Model N 800 XL requires $75 in direct materials per unit, and Model N 500 requires $25.
- The direct labor wage rate is $18 per hour.
- The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products.
- Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity-based costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows:
| Activity Cost Pool | Activity Measure | Estimated Overhead Cost |
|---|---|---|
| Machine setups | Number of setups | $360,000 |
| Special processing | Machine hours | 165,000 |
| General factory | Direct labor-hours | 1,260,000 |
| 1,785,000 |
| Expected Activity | |||
|---|---|---|---|
| Activity Measure | Model N 800 XL | Model N 500 | Total |
| Number of setups | 100 | 200 | 300 |
| Machine-hours | 16,500 | 0 | 16,500 |
| Direct labor-hours | 9,000 | 12,000 | 21,000 |
- Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.
- Compute the predetermined overhead rate.
- Compute the unit product cost of each model.
- Assume that the company decides to use activity-based costing to assign manufacturing overhead cost to products.
- Compute the activity rate for each activity cost pool and determine the amount of overhead cost that would be assigned to each model using the activity-based costing system.
- Compute the unit product cost of each model.
- Explain why manufacturing overhead cost shifts from Model N 500 to Model N 800 XL under activity-based costing.
Activity-Based Costing:
Activity-based costing differs from normal costing because overhead costs are allocated using various activity rates. This makes it possible to assign overhead costs more accurately to products with different production requirements.
Answer and Explanation: 1
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1. We use the total estimated overhead cost and the total estimated direct labor hours to calculate the predetermined rate:
| Total estimated... |
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Chapter 7 / Lesson 6Traditional and activity-based costing methods have similarities and differences based on the production methods of a company. Learn about the costs in production and see the comparisons between traditional and activity-based costing systems.