Reference no: EM132561487

Activity-Based Absorption Costing as an Alternative to Traditional Product Costing

Ellix Company manufactures two models of ultra-high fidelity speakers, the X200 model and the X99 model. Data regarding the two products follow:

                                   Direct                 Annual                Total Direct

Product                            Labor-Hours        Production        Labor-Hours

X200 . . . . . . . . . . . . . .1.8 DLHs per unit    5,000 units            9,000 DLHs

X99 . . . . . . . . . . . . . . .0.9 DLHs per unit      30,000 units          27,000 DLHs

                                                                                             36,000 DLHs

Additional information about the company follows:

a. Model X200 requires $72 in direct materials per unit, and model X99 requires $50.

b. The direct labor rate is $10 per hour.

c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products.

d. Model X200 is more complex to manufacture than model X99 and requires the use of special equipment.

e. Because of the special work required in (d) above, the company is considering the use of activity-based absorption costing to apply manufacturing overhead cost to products. Three activity cost pools have been identified as follows:

                                                Estimated           Estimated Total Activity

Activity Cost Pool Activity Measure  Total Cost            X200 X99 Total

Machine setups . . . . . . . . . Number of setups       $ 360,000 50 100 150

Special processing . . . . . . Machine-hours              180,000 12,000 0 12,000

General factory . . . . . . . . . Direct labor-hours        1,260,000 9,000 27,000 36,000

$1,800,000

Required:

Question 1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.

a. Compute the predetermined overhead rate.

b. Compute the unit product cost of each model.

Question 2 Assume that the company decides to use activity-based absorption costing to apply overhead cost to products.

a. Compute the activity rate for each activity cost pool and determine the amount of overhead cost that would be applied to each model using the activity-based approach.

b. Compute the unit product cost of each model.

Question 3. Explain why overhead cost shifted from the high-volume model to the low-volume model under the activity-based approach.