Merkel Industries Has a Traditional Costing System in Which It

question 48

Essay

Merkel Industries has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs).The company has two products,Large and Small,about which it has provided the following data:
$$\begin{array} { | l | r | r | } \hline \text { Direct materials } & \text { Large } & \text { Small } \\\text { per unit }&\$17.80&\$55.40\\\hline\text { Direct labor per } & \$ 16.10 & \$ 65.20 \\\text { unit } & & \\\text { Direct labor-hours } & 0.70 & 2.40 \\\text { per unit } & & \\\hline \text { Annual production } & 30,000 & 15,000\\\hline\end{array}$$

The company's estimated total manufacturing overhead for the year is $1,793,790 and the company's estimated total direct labor-hours for the year is 57,000.The company is considering using a variation of activity-based costing to determine its unit product costs for external reports.Data for this proposed activity-based costing system appear below:
$$\begin{array} { | l | r | } \hline \text { Activities and Actirity } & \text { Estimated Overhead } \\\text { Measures } & \text { Cost } \\\text { Supporting direct labor (DLHs) } & \$ 285,000 \\\hline \text { Setting up machines (setups) } & 437,190 \\\hline \text { Parts administration (part } & 1,071,600 \\ \text { types) } & \\\hline \text { Total } &\underline{ \$ 1,793,790 }\\\hline\end{array}$$
$$\begin{array} { | l | r | r | r | } \hline \text { Acturities } & \text { Large } & \text { Small } & \text { Total } \\\hline \text { Supporting direct labor } & 21,000 & 36,000 & 57,000 \\\hline \text { Setting up machines } & 798 & 2,565 & 3,363 \\\hline \text { Parts administration } & 1,539 & 1,140 & 2,679 \\\hline\end{array}$$
Required:
a.Determine the unit product cost of each of the company's two products under the traditional costing system.b.Determine the unit product cost of each of the company's two products under activity-based costing system.

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Definitions:

Activity-Based Costing

A pricing strategy that pinpoints various tasks within a company and allocates the expenses of each task to every product and service based on their real usage.

Idle Capacity

The condition where equipment or workspaces are not being used to their full potential, often resulting in inefficiency and lost productivity.

Resource Consumption

The usage of resources such as materials, labor, and energy in the production of goods or services.

Activity-Based Costing

A cost distribution method that assigns overhead and indirect expenses to pertinent products and services based on their activity requirements.