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Home / Questions / Erte In manufactures two models of high-pressure steam valves the XR7 model and the ZD5 mo...

Erte In manufactures two models of high-pressure steam valves the XR7 model and the ZD5 model Data regarding the two products follow Additional information about the company follows

Erte, Inc., manufactures two models of high-pressure steam valves, the XR7 model and the ZD5 model. Data regarding the two products follow:

 

 

 

Additional information about the company follows:

a.       Product XR7 requires $35 in direct materials per unit, and product ZD5 requires $25.

b.       The direct labor rate is $20 per hour.

c.       The company has always used direct labor-hours as the base for applying manufacturing over- head cost to products. Manufacturing overhead totals $1,480,000 per year.

 

 

 

 

d.       Product XR7 is more complex to manufacture than product ZD5 and requires the use of a special milling machine.

e.       Because of the special work required in (d) above, the company is considering the use of activity-based costing to apply overhead cost to products. Three activity cost pools have been identified and the first-stage allocations have been completed. Data concerning these activity cost pools appear below:

 

 

 

 

Activity Cost Pool

Activity Measure

Total Cost

XR7

ZD5

Total

Machine setups . . . . . . .

Number of setups

$   180,000

150

100

250

Special milling . . . . . . . .

Machine-hours

300,000

1,000

0

1,000

General factory . . . . . . . .

Direct labor-hours

1,000,000

4,000

16,000

20,000

 

 

$1,480,000

 

 

 

 

 

 

Required:

1.       Assume that the company continues to use direct labor-hours as the base for applying over- head cost to products.

a.        Compute the predetermined overhead rate.

b.       Determine the unit product cost of each product.

2.       Assume that the company decides to use activity-based costing to apply overhead cost to products.

a.       Compute the activity rate for each activity cost pool. Also, compute the amount of over- head cost that would be applied to each product.

b.       Determine the unit product cost of each product.

3.       Explain why overhead cost shifted from the high-volume product to the low-volume product under activity-based costing.

Jun 29 2020 View more View Less

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