Fairchild, Inc., manufactures two products, Regular and Deluxe, and applies overhead on the basis of direct labor hours. Anticipated overhead and direct labor time for the upcoming accounting period are $1,600,000 and 25,000 hours, respectively. Information about the company's products follows.Regular-Estimated production volume: 3,000 unitsDirect materials cost: $28 per unitDirect labor per unit: 3 hours at $15 per hourDeluxe-Estimated production volume: 4,000 unitsDirect materials cost: $42 per unitDirect labor per unit: 4 hours at $15 per hourFairchild's overhead of $1,600,000 can be identified with three major activities: order processing ($250,000), machine processing ($1,200,000), and product inspection ($150,000). These activities are driven by number of orders processed, machine
hours worked, and inspection hours, respectively. Data relevant to these activities follow.?Orders ProcessedMachine Hours WorkedInspection HoursRegular32016,0004,000Deluxe18024,0006,000Total50040,00010,000Required: A. Compute the pool rates that would be used for order processing, machine processing, and product inspection in an activity-based costing system.B. Assuming use of activity-based costing, compute the unit manufacturing costs of Regular and Deluxe if the expected manufacturing volume is attained.C. How much overhead would be applied to a unit of Regular and Deluxe if the company used traditional costing and applied overhead solely on the basis of direct labor hours? Which of the two products would be undercosted by this procedure? Overcosted?
What will be an ideal response?
A. Order processing: $250,000 ÷ 500 orders processed (OP) = $500 per OP
Machine processing: $1,200,000 ÷ 40,000 machine hours (MH) = $30 per MH
Product inspection: $150,000 ÷ 10,000 inspection hours (IH) = $15 per IH
B.
| Activity | Regular | Deluxe |
| Order processing: | ? | ? |
| 320 OP × $500 | $160,000 | ? |
| 180 OP × $500 | ? | $90,000 |
| Machine processing: | ? | ? |
| 16,000 MH × $30 | 480,000 | ? |
| 24,000 MH × $30 | ? | 720,000 |
| Product inspection: | ? | ? |
| 4,000 IH × $15 | 60,000 | ? |
| 6,000 IH × $15 | ? | 90,000 |
| Total | $700,000 | $900,000 |
| Production volume (units) | 3,000 | 4,000 |
| Cost per unit | $233.33* | $225.00** |
| * $700,000 ÷ 3,000 units = $233.33 | ||
| ** 900,000 ÷ 4,000 units = $225.00 |
| ? | Regular | Deluxe |
| Direct materials | $28.00 | $42,00 |
| Direct labor: | ? | ? |
| 3 hours × $15 | 45.00 | ? |
| 4 hours × $15 | ? | 60.00 |
| Order processing, machine processing, and inspection | 233.33 | 225.00 |
| Total cost | $306.33 | $327.00 |
C. Overhead rate: $1,600,000 ÷ 25,000 direct labor hours (DLH) = $64 per DLH
Regular: 3 hours × $64 = $192
Deluxe: 4 hours × $64 = $256
Regular is undercosted by this procedure, as the more "accurate" ABC figure is $233.33. In contrast, Deluxe is overcosted because the ABC figure for overhead amounts to only $225.
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