Problem - LEC, Inc. makes two types of bicycles. A standard model and a racing model. LEC currently applies overhead using a predetermined rate based on direct-labor hours. A group of company employees recommended that LEC switch to activity based costing and identified the following activities, cost drivers, estimated costs and estimated cost-driver units for 2015 for each activity center.
Activity
Recommended Cost Driver Base
Estimated Costs
Estimated Cost Driver Units
Machine Setup
Number of Production Runs
$80,000
100 Runs
Order Processing
Number of Orders
$120,000
200 Orders
Equipment Maintenance
Number of Machine Hours
$140,000
10,000 Hours
Packaging and Shipping
Number of Units Shipped
$60,000
15,000 Units
In addition management estimated 3000 direct labor hours for 2015.
Direct labor costs were $25 per hour.
Assume the following activities occurred in January of 2015:
Standard Racing
Number of Units Produced 750 500
Direct Material Costs $5,000 $3,000
Direct Labor Hours 150 100
Number of Production Runs 3 6
Number of Orders 8 8
Number of Machine Hours 500 300
Number of Units Shipped 750 550
a) Compute the predetermined overhead rate for 2015 for each cost driver recommended by the employees
b) Compute the production costs for each product for January of 2015 using the cost drivers recommended by the employees and predetermined rates computed in part (a)
c) Compute the predetermined overhead rate for 2015 using direct-labor hours as allocation base
d) Compute the production costs for each product for 2015 using direct labor hours as allocation base and the predetermined overhead rate computed in part (c)