Day 7 Chap 3 Rev. FI5 Ex PR PDF
Day 7 Chap 3 Rev. FI5 Ex PR PDF
Day 7 Chap 3 Rev. FI5 Ex PR PDF
Aerodec, Inc., manufactures and sells two types of wooden deck chairs: Deluxe and Tourist. Annual sales in units,
direct labor-hours (DLHs) per unit, and total direct labor-hours per year are provided below:
Costs for direct materials and direct labor for one unit of each product are given below:
Manufacturing overhead costs total $800,000 each year. The breakdown of these costs among the company's six
activity cost pools is given below. The activity measures are shown in parentheses.
Required:
1. Classify each of Aerodec's activities as either a unit-level, batch-level, product-level, or facility-level activity.
2. Assume that the company applies overhead cost to products on the basis of direct labor-hours.
a. Compute the predetermined overhead rate.
b. Determine the unit product cost of each product, using the predetermined overhead rate computed in
(2)(a) above.
3. Assume that the company uses activity-based costing to compute overhead rates.
a. Compute the activity rate for each of the six activities listed above.
b. Using the rates developed in (3)(a) above, determine the amount of overhead cost that would be
assigned to a unit of each product.
c. Determine the unit product cost of each product and compare this cost to the cost computed in (2)(b)
above.
2. a.
b.
3. a.
b.
c.
Under activity-based costing, the unit product cost of the Deluxe deck chair is much greater than the cost computed
in 2(b), and the unit product cost of the Tourist deck chair is much less. Using volume (direct labor-hours) in 2(b) to
apply overhead cost to products results in too little overhead cost being applied to the Deluxe deck chair (the low-
volume product) and too much overhead cost being applied to the Tourist deck chair (the high-volume product).
THE FOUNDATIONAL 15
Hickory Company manufactures two products—14,000 units of Product Y and 6,000 units of Product Z. The company
uses a plantwide overhead rate based on direct labor-hours. It is considering implementing an activity-based costing
(ABC) system that allocates all of its manufacturing overhead to four cost pools. The following additional information
is available for the company as a whole and for Products Y and Z:
The company has a conventional costing system in which manufacturing overhead is applied to units based on direct
labor-hours. Data concerning manufacturing overhead and direct labor-hours for the upcoming year appear below:
Required:
1. Compute the predetermined overhead rate based on direct labor-hours. Using this rate and other data from
the problem, determine the unit product cost of each product.
2. The company is considering replacing its conventional costing system with an activity-based costing system
that would assign its manufacturing overhead to the following four activity cost pools:
Determine the activity rate for each of the four activity cost pools.
3. Using the activity rates and other data from the problem, determine the unit product cost of each product.
4. Explain why the conventional and activity-based cost assignments differ.
PROBLEM 3–12A Contrasting ABC and Conventional Product Costs [LO2, LO3, LO4]
Precision Manufacturing Inc. (PMI) makes two types of industrial component parts—the EX300 and the TX500. It
annually produces 60,000 units of EX300 and 12,500 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:
The company is considering implementing an activity-based costing system that distributes all of its manufacturing
overhead to four activities as shown below:
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Required:
1. Compute the plantwide overhead rate that would be used in the company's conventional cost system. Using
the plantwide rate, compute the unit product cost for each product.
2. Compute the activity rate for each activity cost pool. Using the activity rates, compute the unit product cost
for each product.
3. Why do the conventional and activity-based cost assignments differ from one another?
Required:
1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to
products.
a. Compute the predetermined overhead rate.
b. Compute the unit product cost of each model.
2. Assume that the company decides to use activity-based costing to assign manufacturing overhead cost to
products.
a. 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.
b. Compute the unit product cost of each model.
3. Explain why manufacturing overhead cost shifts from Model N 500 to Model N 800 XL under activity-based
costing.