Siegel Company manufactures a product that is available in both a deluxe model and a regular model. The company has manufactured the regular model for years. The deluxe model was introduced several years ago to tap a new segment of the market. Since introduction of the deluxe model, the company's profits have steadily declined and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.
Manufacturing overhead is assigned to products on the basis of direct labor-hours. For the current year, the company has estimated that it will incur $900,000 in manufacturing overhead cost and produce 5,000 units of the deluxe model and 40,000 units of the regular model. The deluxe model requires two hours of direct labor time per unit, and the regular model requires one hour. Material and labor costs per unit are as follows.
_________Model____________
Deluxe Regular
Direct materials.................................. $40 $25
Direct labor........................................ $14 $7
Required:
1. Using direct labor-hours as the base for assigning overhead cost to products, compute the predetermined overhead rate. Using this rate and other data from the problem, determine the unit product cost of each model.
2. Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. The activity-based costing system would have the following four activity cost pools.
Activity Cost Pool Activity Measure Estimated Overhead Cost
Purchasing...................... Purchase orders issued $204,000
Processing...................... Machine-hours 182,000
Scrap/rework.................. Scrap/rework orders issued 379,000
Shipping......................... Number of shipments 135,000
___________ Expected Activity____________
Activity Measure Deluxe Regular Total
Purchase orders issued................. 200 400 600
Machine-hours............................. 20,000 15,000 35,000
Scrap/rework orders issued......... 1,000 1,000 2,000
Number of shipments.................. 250 650 900
Using Exhibit 8-6 as a guide, determine the predetermined overhead rate for each of the four activity cost pools.
3. Using the predetermined overhead rates you computed in part (2) above, do the following:
a. Compute the total amount of manufacturing overhead cost that would be applied to each model using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each model.
b. Compute the unit product cost of each model (direct materials, direct labor, and manufacturing overhead).
4. From the data you have developed in parts (1) through (3) above, identify factors that may account for the company's declining profits.