Traditional Costing, ABC Costing, Direct Labor Hours

The new president of the Wernecke Company was stumped. Why had profits gone down? He had directed the sales department to push the product with the highest contribution margin, and the sales department had come through with flying colors. The percent of flams sold had increased from 25% to 37.5% of units sold. So what happened? What am I doing right and what am I doing wrong?
flims Flams

Sales price per unit 150 500
Direct materials per unit 75 200
Direct labor cost per unit 25 25
Direct labor hours per unit 1 5
Number of units produced 25,000 15,000

The variable overhead for the coming year is estimated to be $3,000,000

1) Calculate the estimated direct labor hours to produce flims and flams

2) Calculate the predetermined variable overhead rate that will be used in the coming year using a traditional costing system based upon direct labor hours.

3) Using a traditional costing system based upon direct hours compute the unit prodcut costs for flims and flams as well as the contribution margin

4) It has been suggested to the president to consider the use of an ABC costinng system to allocate manufacturing overhead. Engineering studies have revealed the following information about estimated manufacturing activites for the coming year.
Activity cost pool Estimated overhead cost Expected activity level
setups 850,000 200
scrap 350,000 500
Testing 200,000 5,000
Machine related 1,600,000 100,000 Mhrs
Calculate the separate predetermined overhead rates for each of the activities listed above
5) The following data is available about the activity levels needed to produce the projected 25,000 units of flims and the 15,000 units of flams.
Flims Flams
Setups 50 150
Scrap 200 300
Testing 2,000 3,000
Machine related 12,500 87,500
Calculate the variable overhead to be applied to flims and flams

6) Calculate the total overhead (total for company) to be applied to flims and flams.

7) Calculate the projected unit costs and unit contribution margin for flims and flams using ABC costing.

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Solution Summary

The solution computes the total overhead to be applied,the projected unit costs and unit contribution margin, the separate predetermined overhead rates.