Smithville Industries Has a Traditional Costing System in Which It

question 114

Essay

Smithville 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,Manual and Power,about which it has provided the following data: $$\begin{array} { | l | r | r | } \hline & \text { Manua } & \text { Power } \\\hline \text { Direct materials per unit } & \$ 27.50 & \$ 64.90 \\\hline \text { Direct labor per unit } & \$ 7.80 & \$ 23.40 \\\hline \text { Direct labor-hours per unit } & 0.60 & 1.80 \\\hline \text { Annual production } & 40,000 & 15,000 \\\hline\end{array}$$
The company's estimated total manufacturing overhead for the year is $2,675,460 and the company's estimated total direct labor-hours for the year is 51,000.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:
$$\begin{array} { | l | r | } \hline \text { Activities and Actirity } & \text { Estimated Overhead } \\\text { Measures } & \text { Cost } \\\text { Supporting direct labor (DLHs) } & \$ 1,326,000 \\\hline \text { Setting up machines (setups) } & 456,960 \\\hline \text { Parts administration (part } & 892,500 \\\text { types) } & \\\hline \text { Total } & \underline{\$ 2,675,460 }\\\hline\end{array}$$
$$\begin{array} { | l r | r r | } \hline & \text { Manual } & \text { Power } & \text { Total } \\\hline \begin{array} { l } \text { Supporting } \\\text { direct labor }\end{array} & 24,000 & 27,000 & 51,000 \\\hline \text { Setting up } & 2,346 & 510 & 2,856 \\\text { machines } & \\\hline \begin{array} { l } \text { Parts } \\\text { administration }\end{array} &1,122 & 663 & 1,786 \\\hline\end{array}$$
Required:
a.Determine the manufacturing overhead cost per unit of each of the company's two products under the traditional costing system.b.Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.

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Definitions:

Reality Checks

Methods or situations that force an individual or group to consider the actual circumstances surrounding them, often dispelling illusions.

Semiprogrammed Decisions

Decisions that are made with a mix of established procedures and the judgment of the decision-maker, often used when faced with partially known circumstances.

Contingent Decisions

Contingent decisions are decisions made based on certain conditions or situations arising, meaning they are dependent on particular events or circumstances.

Nonprogrammed Decisions

Decisions that are unique, require custom solutions, and are typically made in response to situations that are novel, unstructured, and not anticipated.