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Product Cost Distortion and Product Pricing

Sounds Fine, Inc. manufactures two models of stereo speakers. Cost estimates for the two models for the coming year are as follows:
Basic Model Advanced Model
Direct Material ................... $160 $260
Direct Labor(10 hours at $14per hour) 140 140
Manufacturing overhead.........................100 100
Total Cost................................................$400 $500
*The predetermined overhead rate is $10 per direct labor hour.
Each stereo speaker requires 10 hours of direct labor. Each basic model unit requires two hours in Department I and eight hours in department II. Each unit of the advanced model requires eight hours in department I and two hours in department II. The manufacturing overhead costs expected during the coming year in Departments I and II are as follows:
Department I Department II
Variable overhead.....................$8 per direct-labor hour $400 per direct-labor hr
Fixed overhead .........................$150,000 $150,000
The expected operating activity for coming year is $37,500 direct-labor hours in each department.
Required:
1. Show how Sounds Fine, Inc. derived its predetermined overhead rate.
2. What will be the price of each model stereo speaker if the company prices its products at absorption manufacturing cost plus 15 percent.
3. Suppose Sounds Fine, Inc. were to use departmental overhead rates. Compute these rates for Department I and II for the coming year.
4. Compute the absorption cost of each model stereo speaker using the departmental overhead rates computed in requirement (3).
5. Suppose management sticks with its policy of setting prices equal to absorption cost plus 15 percent. Compute the new price for each speaker model using the product costs developed in requirement (4).
6. Should Sounds Fine, Inc use plant-wide or departmental overhead rates? Explain your answer.

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1. Show how Sounds Fine, Inc. derived its predetermined overhead rate.

The variable overhead rate is given. We are also given that budgeted hours are 37,500. The total variable overhead is rate X hours. Fixed overhead cost is given.
Predetermined overhead rate = Total overhead/total hours

2. What will be the price of each model stereo speaker if the company prices its products at absorption manufacturing cost plus 15 ...

Solution Summary

This solution provides a complete computation and explanation of the given accounting problem formatted in Excel.

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