PROBLEM

Aerodec, Inc., manufactures and sells two types of wooden deck chairs: Deluxe and Tourist. Annual sales in units, direct
labor hours (DLHs) per unit, and total direct labor hours per year are provided below:

Deluxe deck chair:2,000 units x 5 DLHs per unit 10,000

Tourist deck chair:10,000 units x 4 DLHs per unit 40,000

Total direct labor hours 50,000

Cost for direct materials and direct labor for one unit of each product are given below:

Deluxe Tourist
Direct materials $25 $17
Direct labor(at $12 per DLH) $60 ( 5 DLHs x $12 ) $48 ( 4 DLHs x $12 )

TAKE NOTE KUNG ILAN ANG KAILANGAN NA DIRECT LABOR HOURS SA ISANG UNIT AT KUNG YUNG GIVEN NA
DIRECT LABOR RATE BA AY PER UNIT NA OR PER HOUR PALANG ( ex. $12 per DLH so $60 per unit for Deluxe)

Manufacturing overhead costs total $800,000 each year. The breakdown of these costs among the company’s six activity
cost pools is given below. The activity measures are shown in parentheses.

Expected Activity
Activity Cost Pools and Estimated Deluxe Tourist Total
Activity Measures Overhead Cost
Labor related ( direct labor $80,000 10,000 40,000 50,000
hours )
Machine setups ( number of 150,000 3,000 2,000 5,000
setups )
Parts administration 160,000 50 30 80
( number of parts )
Production orders ( number 70,000 100 300 400
of orders )
Material receipts ( number of 90,000 150 600 750
receipts )
General factory ( machine 250,000 12,000 28,000 40,000
hours )
$800,000
Required:

1. Classify each of Aerodec’s activities as either a unit level, batch level, product level, or facility level activity.
2. Assume that the company applies overhead cost to products on the basis of direct labor hours.
a. Compute the predetermined overhead rate.
b. Determine the unit product cost of each product, using the predetermined overhead computed in
(2)(a) above.
3. Assume that the company is using activity based costing to compute overhead rates.
a. Compute the activity rate for each of the activities listed above.
b. Using the rates developed in (3)(a) above, determine the amount of overhead cost that would be
assigned to a unit of each product.
c. Determine the unit product cost of each product, and compare this cost to the cost computed in (2)
(b) above.
 SOLUTION GUIDE

1.
Activity Cost Pools Type of Activity
Labor related Unit level
Machine setups Batch level
Parts administration Product level
Production orders Batch level
Material receipts Batch level
General factory Facility level

2.a Predetermined overhead rate = Estimated total manufacturing overhead

Estimated total amount of the allocation base

= $800,000

50,000 DLHs

= $16 per DLH

2.b

Deluxe Tourist
Direct materials $25 $17
Direct labor(at $12 per DLH) $60 ( 5 DLHs x $12 ) $48 ( 4 DLHs x $12 )
Manufacturing overhead $80 ( 5 DLHs x $16 ) $64 ( 4 DLHs x $16 )
applied(at $16 per DLH)
Unit Product Cost $165 $129

3.a

Activity Cost Pools Estimated Total Expected Activity Rate

Overhead Cost(a) Activity (b) (a/b)
Labor related ( direct labor $80,000 50,000 DLHs $1.6 per DLH
hours )
Machine setups ( number of 150,000 5,000 setups $30.00 per setup
setups )
Parts administration 160,000 80 parts $2,000 per part
( number of parts )
Production orders ( number 70,000 400 orders $175 per order
of orders )
Material receipts ( number of 90,000 750 receipts $120 per receipt
receipts )
General factory ( machine 250,000 40,000 MHs $6.25 per MH
hours )
 3.b

Deluxe Tourist
Activity Cost Pools and Expected Activity Amount Expected Activity Amount
Activity Measures
Labor related ( direct labor 10,000 $16,000 40,000 $64,000
hours )
Machine setups ( number of 3,000 90,000 2,000 60,000
setups )
Parts administration 50 100,000 30 60,000
( number of parts )
Production orders ( number 100 17,500 300 52,500
of orders )
Material receipts ( number of 150 18,000 600 72,000
receipts )
General factory ( machine 12,000 75,000 28,000 175,000
hours )
Total Overhead Cost $316,500 $483,500
Assigned (a)
Number of Units Produced 2,000 10,000
(b)
Overhead Cost per Unit (a/b) $158.25 $48.35

3.c

Deluxe Tourist
Direct materials $25 $17
Direct labor(at $12 per DLH) $60 ( 5 DLHs x $12 ) $48 ( 4 DLHs x $12 )
Manufacturing overhead $158.25 $48.35
applied (see above )
Unit Product Cost $243.25 $113.35
Under ABC, the unit product cost of the Deluxe deck chair is much greater than the cost computed in (2)(b), and
the unit product cost of the Tourist deck chair is much less. Using volume (direct labor hours) in (2)(b) to apply
overhead cost to products results in too little overhead cost being applied to the Deluxe deck chair (the low
volume product ) and too much overhead cost being applied to the Tourist deck chair (the high volume
product ).