Solid Office Company manufactures two types of CHAIRS, Staff and Executive Chairs, Manufacturing overhead applied into production on the bases of direct labor hours.
The estimated manufacturing overhead is $800,000 and the estimated direct labor hours are 25000 hours.
Cost information is as follows:
Staff Chair Executive chair
Direct material cost $25 per unit $40 per unit
Direct labor cost 12 per hour 12 per hour
Budgeted volume 3000 4000

The Management is concerning to use ABC system.
Management identifies three activities:
1) Inspection hours.
2) Machine hours. And
3) Product shipment.
Data pertaining to those activities are as follows:
Staff chair Executive chair
Inspection hours 2000 8000
Machine hours 18000 H 22000 H
No of Shipments 300 Shipments 200 Shipments


Manufacturing overhead for the three activities are as follows:
Inspection hours. $90,000
Machine hours. And $560,000
Product shipment. $150,000

Requirements:
1) Under normal costing compute the Manufacturing overhead Per unit for both products?
2) Calculate the over or under applied overhead for both products?
3) Under ABC system compute the Manufacturing overhead per unit for both products?

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1) Under normal costing compute the Manufacturing overhead per unit for both products?


Manufacturing overhead = $90,000 + $560,000 + $150,000 = $ 800,000

Predetermined overhead rate = budgeted overhead ÷ budgeted direct-labor hours

Predetermined overhead rate = $800,000/25,000* H = $32 per direct labor hours.

*25,000 budgeted direct-labor hours = (3,000 units of Standard) (3 hrs. /unit) +
(4,000 units of Enhanced)(4hrs. /unit)

Manufacturing overhead Per unit
Staff Chair $32×3= 96$
Executive chair $32×4= 128$


2) Calculate the over or under applied overhead for both products?

Staff Chair Executive chair
$ 96 × 3000 = $ 288,000 $128× 40000 = $ 512,000

As per the above applied overhead total = $288,000+$512,000=$800,000
So the variance is equal zero.



3) Under ABC system compute the Manufacturing overhead per unit for both products?


Activity
Cost Activity Cost Driver Application
Rate

Product Shipments $150,000 ÷ 500 SH = $300 per SH

Machine Hours 560,000 ÷ 40,000 Hrs.(MH) = $14 per MH

Inspection Hours 90,000 ÷ 10,000 (IH) = $9 per IH

Product Shipments, machine hours, and inspection hour's costs of staff chair and an executive chair:
Activity Staff Chair Executive chair

Product Shipments:
300 SH x $300……………... $ 90,000
200 SH x $300……………... $ 60,000
Machine Hours
18,000 MH x $14…………... 252,000
22,000 MH x $14…………... 308,000
Inspection Hours
2,000 IH x $9……………….. 18,000
8,000 IH x $9………………. 72,000
Total $360,000 $440,000
Production volume (units) 3,000 4,000
Cost per unit $120* $110**

* $360,000 ÷ 3,000 units = $120
** $440,000 ÷ 4,000 units = $110
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