Managerial Accounting
Managerial Accounting
You have just completed your study of activity based costing (ABC). This project will provide you an opportunity to apply your knowledge in calculating the cost of products. Please show all calculations, and explain your answers when necessary.
Lionel Corporation manufactures two products, Product B and Product H. Product H is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product B. Product H is the more complex of the two products, requiring two hours of direct labor time per unit to manufacture compared to one hour of direct labor time for Product B. Product H is produced on an automated production line.
Overhead is currently assigned to the products on the basis of direct labor-hours. The company estimated it would incur $450,000 in manufacturing overhead costs and produce 7,500 units of Product H and 30,000 units of Product B during the current year. Unit costs for materials and direct labor are:
Required:
a. Compute the predetermined overhead rate under the current method of allocation and determine the unit product cost of each product for the current year.
b. The company’s overhead costs can be attributed to four major activities. These activities and the amount of overhead cost attributable to each for the current year are given below:
Product B Product H
Direct material $12 $25
Direct Labor $10 $20
Expected Activity
Activity Cost Pools Estimated Overhead Cost Product B Product H Total
Machine Setups Required $180,000 600 1,200 1,800
Purchase orders issued 38,382 500 100 600
Machine-hours required 92,650 6,800 10,200 17,000
Maintenance requests issued 138,968 693 907 1,600
$450,000
Using the data above and an activity-based costing approach, determine the unit product cost of each product for the current year.
c. What other methods could you have used to calculate the cost of the products?
d. Discuss the differences between the methods.
