Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined. Sales of the deluxe model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $3,080,000 in overhead costs would be incurred and the company would produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and labor costs per unit are given below: Deluxe Regular Direct materials cost per unit $50.00 $30.00 Direct labor cost per unit $30.00 $15.00 An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. . It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed below: Activity Cost Pool and Activity Measure Estimated Overhead cost Activity Total Deluxe Regular Purchase orders (number of orders) $ 60,000 500 1,000 1,500 Rework requests (number of requests) 280,000 800 2,000 2,800 Product testing (number of tests) 240,000 7,000 3,000 10,000 Machine-related (machine-hours) 2,500,000 4,500 8,000 12,500 $3,080,000 INSTRUCTION Assume that actual activity is as expected for the year. Using activity-based costing, do the following: A) Determine the total amount of overhead that would be applied to each model for the year. B) Compute the unit product cost for one unit of each model.
Weston Corporation manufactures a product that is available in both a deluxe and a regular model. The company has made the regular model for years; the deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined. Sales of the deluxe model have been increasing rapidly. Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $3,080,000 in overhead costs would be incurred and the company would produce and sell 10,000 units of the deluxe model and 50,000 units of the regular model. The deluxe model requires 2.0 hours of direct labor time per unit, and the regular model requires 1.0 hours. Materials and labor costs per unit are given below:
Deluxe Regular
Direct materials cost per unit $50.00 $30.00
Direct labor cost per unit $30.00 $15.00
An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. . It came back with the recommendation that four activity cost pools be used. These cost pools and their associated activities are listed below:
|
Activity Cost Pool and Activity Measure
|
Estimated Overhead cost |
Activity |
|
Total |
|
|
|
Deluxe |
Regular | |
|
Purchase orders (number of orders) |
$ 60,000 |
500 |
1,000 |
1,500 |
|
Rework requests (number of requests) |
280,000 |
800 |
2,000 |
2,800 |
|
Product testing (number of tests) |
240,000 |
7,000 |
3,000 |
10,000 |
|
Machine-related (machine-hours) |
2,500,000 |
4,500 |
8,000 |
12,500 |
|
|
$3,080,000 | |||
|
|
INSTRUCTION
Assume that actual activity is as expected for the year. Using activity-based costing, do the following:
A) Determine the total amount of overhead that would be applied to each model for the year.
B) Compute the unit product cost for one unit of each model.
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