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    Direct labor hours, overhead rate, product cost using ABC

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    Industries Inc. manufactures 2 products: A and B. A review of the company's accounting records revealed the following per-unit costs and production volume:
    Product A Product B
    Production volume(units) 2500 5000

    Direct material cost per unit $40 $60

    Direct Labor cost:
    2 hours at $12 $24
    3 hours at $12 $36

    Manufacturing overhead
    2 hours at $93 $186
    3 hours at $93 $279

    Manufacturing overhead is budgeted at $1,860,000.

    Part 1
    a. Using direct labor hours as the base for assigning manufacturing overhead cost to products, compute the direct labor needed and the predetermined overhead rate using direct labor hours.
    Hint: the predetermined overhead rate you compute should be $93, since I have given you the answer but I want to make sure you know how to determine the $93.
    Direct labor hours, budget hours
    Product A
    Product B
    Total direct labor hours

    "Predetermined Overhead
    rate" per direct labor hour
    b. Using the predetermined overhead rate you determined in "a" above, determine the unit product cost of each product.
    Hint: Don't forget that unit product cost includes direct material, direct labor, and Manufacturing overhead. Don't make this complicated, since the numbers are already there for you.

    Product A Product B
    Direct material cost per unit $40
    Direct labor cost per unit
    Manufacturing overhead per unit
    Total product cost per unit

    Part 2
    You are a recent hire to Industries Inc. and you have made it known that you just recently completed an MBA program that had a management accounting
    course that taught you about another costing system that might be appropriate. During a meeting, you suggested that an ABC system might be a more
    accurate costing system. Management has asked you to recompute the unit cost using the ABC costing approach, since the company is showing declining profits.

    a. First complete the following chart that is set up like exhibit 5-7 on page 177, and there is a more detailed explanation of the 3 step calculation approach example
    on page 176 exhibit 5-6. I have highlighted the columns in red you need to complete.
    Activity Activity Cost pool Cost driver Cost Driver Quantity Pool rate Product line "Cost driver
    quantity for product line" "Activity cost
    for product line" "Product
    volume" "Activity cost per unit
    of product"
    Setups $240,000 Number of setups 120 Product A 100 2,500
    Product B 20 5,000
    Total 120
    General Factory 1,500,000 Direct labor hours 20,000 Product A 5000 2,500
    Product B 15000 5,000
    Total 20000
    Machine processing 120,000 Machine hours 3,000 Product A 2200 2,500
    Product B 800 5,000
    Grand Total $1,860,000

    b. Complete the following table to determine the unit product costs from ABC, just like the exhibit 5-8 on page 178

    Product A Product B
    Direct material cost per unit $40
    Direct labor cost per unit
    Total direct costs per unit

    Manufacturing overhead(based on ABC)
    General Factory
    Machine processing
    Total product cost per unit

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    Solution Summary

    The expert examines direct labor hours, overhead rate and product cost using ABC.