Home / Questions / Erte In manufactures two models of highpressure steam valves the XR7 model and the ZD5 mo...
Erte, Inc., manufactures two models of highpressure 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 laborhours 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 activitybased costing to apply overhead cost to products. Three activity cost pools have been identified and the firststage 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 . . . . . . . . 
Machinehours 
300,000 
1,000 
0 
1,000 
General factory . . . . . . . . 
Direct laborhours 
1,000,000 
4,000 
16,000 
20,000 


$1,480,000 



Required:
1. Assume that the company continues to use direct laborhours 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 activitybased 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 highvolume product to the lowvolume product under activitybased costing.
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