90.2K

Verified Solution

Link Copied!

Rehm Company manufactures a product that is available in both a deluxe model and a regular model. Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current 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:

	MODEL
	Deluxe	Regular
Direct material	$154	$112
Direct labor	$16	$8

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:

Activity cost pool	Activity measure	Estimated overhead cost
Purchase order	Number of purchase orders	$252,000
Scrap/Rework orders	Number of scrap/rework orders	$648,000
Product testing	Number of tests	$13,50,000
Machine related	Machine-hours	$37,50,000
TOTAL		$60,00,000

Activity measure	Expected activity
	Deluxe	Regular	Total
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

Requirements:

a. 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.

b. Using activity based costing, determine the unit product cost of each model.

c. Explain the difference between traditional and activity based costing unit cost.

Answer & Explanation Solved by verified expert

See Answer