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