ACC 2313 Assignment 5 Activity Based Costing questions and answer

Question 1 (10 Marks) "Hot Potato Company manufactures two products, Product 2 and Product 8. Product 8 is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product 2. Product 8 is the more complex of the two products, requiring two hours of direct labour time per unit to manufacture compared to one hour of direct labour time for Product 2. Product 8 is produced on an automated production line. Overhead is currently assigned to the products on the basis of direct labour-hours. The company estimated it would incur a total of $450,000 in manufacturing overhead costs and produce 7,500 units of Product 8 and 30,000 units of Product 2 during the current year. Unit costs for materials and direct labour are:" Product 2 Product 8 Direct Labour 10 20 Direct Material 12 25 Required: a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year. (5 marks) Product 2 Product 8 Total Direct labour hr/unit 1 2 units to be made 30000 7500 Total Direct 30000 15000 45000 Overhead cost Total direct labour hr 45000 Overhead rate/labour hr 10 Product 2 Product 8 Direct materials 12 25 Direct labour 10 20 Overhead cost 10 20 Total unit cost 32 65 b. The company's overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below: (5 marks) Expected Activity Activity Costs Pools Estimated Overhead Costs Product 2 Product 8 Total Machine set-ups required $180,000 600 1,200 1,800 Purchase orders issued 38,382 500 100 600 Machine-hours required 92,650 6,800 10,200 17,000 Maintenance requests issued 138,968 693 907 1,600 $450,000 Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.  Activity costs pools Product 2 Product 8 Total Machine setup 60000 Purchase setup 31985 6397 38382 Machine hours 37060 55590 92650 Maintenance requests 60191 78777 Over head costs Unit to be made 30000 7500 Overhead cost/unit 6.31 34.77 Unit product cost Product2 Product 8 Direct material 12 25 Overhead cost 6.31 34.77 Direct labour 10 20 Total unit product cost 28.31 79.77