TUV Manufacturing Corporation 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, B40W and C63J, about which it has provided the following data: B40W C63J Direct materials per unit .............. ₱34.90 ₱63.70 Direct labor per unit .................... ₱20.80 ₱62.40 Direct labor-hours per unit .......... 0.80 2.40 Annual production ....................... 35,000 15,000 The company’s estimated total manufacturing overhead for the year is ₱2,656,000 and the company’s estimated total direct labor-hours for the year is 64,000. 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: Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) ..................... ₱1,216,000 Preparing batches (batches) ..................... 480,000 Milling (MHs) ............................................ 960,000 Total .......................................................... ₱2,656,000 Activities B40W C63J Total Assembling products.............. 28,000 36,000 64,000 Preparing batches .................. 2,304 2,496 4,800 Milling .................................... 1,088 2,112 3,200 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.
Question
TUV Manufacturing Corporation 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, B40W and C63J, about which it has provided the following data: B40W C63J Direct materials per unit .............. ₱34.90 ₱63.70 Direct labor per unit .................... ₱20.80 ₱62.40 Direct labor-hours per unit .......... 0.80 2.40 Annual production ....................... 35,000 15,000 The company’s estimated total manufacturing overhead for the year is ₱2,656,000 and the company’s estimated total direct labor-hours for the year is 64,000. 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: Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) ..................... ₱1,216,000 Preparing batches (batches) ..................... 480,000 Milling (MHs) ............................................ 960,000 Total .......................................................... ₱2,656,000 Activities B40W C63J Total Assembling products.............. 28,000 36,000 64,000 Preparing batches .................. 2,304 2,496 4,800 Milling .................................... 1,088 2,112 3,200 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.
Solution
Sure, let's calculate the unit product cost for each product under both the traditional costing system and the activity-based costing system.
a. Traditional Costing System:
First, we need to calculate the predetermined overhead rate. This is done by dividing the total estimated manufacturing overhead by the total estimated direct labor-hours.
Predetermined overhead rate = Total estimated manufacturing overhead / Total estimated direct labor-hours = ₱2,656,000 / 64,000 DLHs = ₱41.50 per DLH
Next, we calculate the overhead applied to each product by multiplying the predetermined overhead rate by the direct labor-hours per unit for each product.
Overhead for B40W = Predetermined overhead rate * Direct labor-hours per unit = ₱41.50 * 0.80 = ₱33.20
Overhead for C63J = Predetermined overhead rate * Direct labor-hours per unit = ₱41.50 * 2.40 = ₱99.60
Finally, we add the direct materials, direct labor, and applied overhead to find the unit product cost for each product.
Unit product cost for B40W = Direct materials + Direct labor + Applied overhead = ₱34.90 + ₱20.80 + ₱33.20 = ₱88.90
Unit product cost for C63J = Direct materials + Direct labor + Applied overhead = ₱63.70 + ₱62.40 + ₱99.60 = ₱225.70
b. Activity-Based Costing System:
First, we need to calculate the rate for each activity. This is done by dividing the estimated overhead cost for each activity by the total activity measure for each activity.
Rate for assembling products = Estimated overhead cost / Total activity measure = ₱1,216,000 / 64,000 DLHs = ₱19 per DLH
Rate for preparing batches = Estimated overhead cost / Total activity measure = ₱480,000 / 4,800 batches = ₱100 per batch
Rate for milling = Estimated overhead cost / Total activity measure = ₱960,000 / 3,200 MHs = ₱300 per MH
Next, we calculate the overhead applied to each product by multiplying the rate for each activity by the activity measure for each product.
Overhead for B40W = (Rate for assembling products * Activity measure for B40W) + (Rate for preparing batches * Activity measure for B40W) + (Rate for milling * Activity measure for B40W) = (₱19 * 28,000) + (₱100 * 2,304) + (₱300 * 1,088) = ₱532,000 + ₱230,400 + ₱326,400 = ₱1,088,800
Overhead for C63J = (Rate for assembling products * Activity measure for C63J) + (Rate for preparing batches * Activity measure for C63J) + (Rate for milling * Activity measure for C63J) = (₱19 * 36,000) + (₱100 * 2,496) + (₱300 * 2,112) = ₱684,000 + ₱249,600 + ₱633,600 = ₱1,567,200
Finally, we add the direct materials, direct labor, and applied overhead to find the unit product cost for each product.
Unit product cost for B40W = Direct materials + Direct labor + Applied overhead = ₱34.90 + ₱20.80 + (₱1,088,800 / 35,000) = ₱34.90 + ₱20.80 + ₱31.11 = ₱86.81
Unit product cost for C63J = Direct materials + Direct labor + Applied overhead = ₱63.70 + ₱62.40 + (₱1,567,200 / 15,000) = ₱63.70 + ₱62.40 + ₱104.48 = ₱230.58
So, under the traditional costing system, the unit product cost for B40W is ₱88.90 and for C63J is ₱225.70. Under the activity-based costing system, the unit product cost for B40W is ₱86.81 and for C63J is ₱230.58.
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