Problem - LEC, Inc. makes two types of bicycles. A standard model and a racing model. LEC currently applies overhead using a predetermined rate based on direct-labor hours. A group of company employees recommended that LEC switch to activity based costing and identified the following activities, cost drivers, estimated costs and estimated cost-driver units for 2015 for each activity center.

Activity

Recommended Cost Driver Base

Estimated Costs

Estimated Cost Driver Units

Machine Setup

Number of Production Runs

$80,000

100 Runs

Order Processing

Number of Orders

$120,000

200 Orders

Equipment Maintenance

Number of Machine Hours

$140,000

10,000 Hours

Packaging and Shipping

Number of Units Shipped

$60,000

15,000 Units

In addition management estimated 3000 direct labor hours for 2015.

Direct labor costs were $25 per hour.

Assume the following activities occurred in January of 2015:

Standard Racing

Number of Units Produced 750 500

Direct Material Costs $5,000 $3,000

Direct Labor Hours 150 100

Number of Production Runs 3 6

Number of Orders 8 8

Number of Machine Hours 500 300

Number of Units Shipped 750 550

a) Compute the predetermined overhead rate for 2015 for each cost driver recommended by the employees

b) Compute the production costs for each product for January of 2015 using the cost drivers recommended by the employees and predetermined rates computed in part (a)

c) Compute the predetermined overhead rate for 2015 using direct-labor hours as allocation base

d) Compute the production costs for each product for 2015 using direct labor hours as allocation base and the predetermined overhead rate computed in part (c)