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Rehm Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was in- troduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company’s profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been in- creasing rapidly.
Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the cur- rent year, the company has estimated that it will incur $6,000,000 in manufacturing overhead cost and produce 15,000 units of the deluxe model and 120,000 units of the regular model. The deluxe model requires 1.6 hours of direct labor time per unit, and the regular model requires 0.8 hours. Material and labor costs per unit are as follows:
Direct materials . . . . . . . . . . . |
$154 |
$112 |
Direct labor . . . . . . . . . . . . . . |
$16 |
$8 |
Required:
1. Using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. Using this rate and other data from the problem, determine the unit product cost of each model.
2. Management is considering using activity-based costing to apply manufacturing overhead costs to products for external financial reports. The activity-based costing system would have the following four activity cost pools:
Number of purchase orders . . . . . . . . |
400 |
800 |
1,200 |
Number of scrap/rework orders . . . . . |
500 |
400 |
900 |
Number of tests . . . . . . . . . . . . . . . . . |
6,000 |
9,000 |
15,000 |
Machine-hours . . . . . . . . . . . . . . . . . . |
20,000 |
30,000 |
50,000 |
Using Exhibit 7–6 as a guide, compute the predetermined overhead rates (i.e., activity rates) for each of the four activity cost pools.
3. Using the predetermined overhead rates computed in part (2) above, do the following:
a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit for each model.
b. Compute the unit product cost of each model (materials, labor, and manufacturing overhead).
4. From the data you have developed in (1) through (3) above, identify factors that may account for the company’s declining profits.
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