Question: Puget World, Inc., manufactures two models of television sets, the N 800 XL model and the N 500 model. Data regarding the two products follow:
Direct Labor-Hours per Unit Annual Production Total Direct Labor-Hours
Model N 800 XL 3.0 3,000 units 9,000
Model N 500 2.0 10,000 units 20,000
29,000
Additional information about the company follows:
a. Model N 800 XL requires $60 in direct materials per unit, and Model N 500 requires $20.
b. The direct labor wage rate is $22 per hour.
c. The company has always used direct labor-hours as the base for applying manufacturing overhead cost to products.
d. Model N 800 XL is more complex to manufacture than Model N 500 and requires the use of special equipment. Consequently, the company is considering the use of activity-based costing to assign manufacturing overhead cost to products. Three activity cost pools have been identified as follows:
Activity Cost Pool Activity Measure Estimated Overhead Cost
Machine setups Number of setups $320,000
Special processing Machine-hours 260,000
General factory Direct labor-hours 1,305,000
$1,885,000
Expected Activity
Activity Measure Model N 800 XL Model N 500 Total
Number of setups 80 170 250
Machine-hours 16,000 0 16,000
Direct labor-hours 9,000 20,000 29,000
Required:
1. Assume that the company continues to use direct labor-hours as the base for applying overhead cost to products.
a. Compute the predetermined overhead rate.
b. Compute the unit product cost of each model.
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