Question

Tulip Company produces two products, T and U. The indirect labor costs include the following two items:

Plant supervision $ 700,000
Setup labor (indirect) 300,000
Total indirect labor $1,000,000
The following activity-base usage and unit production information is available for the two products:
Number of setups Direct Labor Hours Units
Product T 200 20,000 900
Product U 200 30,000 1,100
Total 400 50,000 2,000
(a) Determine the single plantwide factory overhead rate, using direct labor hours
as the activity base.
(b) Determine the factory overhead cost per unit for Products T and U, using the single plantwide factory overhead rate.
(c) Determine the activity rate for plant supervision and setup labor, assuming that the activity base for supervision is direct labor hours and the activity base for setup is number of setups.
(d) Determine the factory overhead cost per unit for Products T and U, using activity-based costing.
(e) Why is the factory overhead cost per unit different for the two products under the two methods?

Answer 1

The single plantwide factory overhead rate using direct labor hours as the activity base is $20 per direct labor hour. The factory overhead cost per unit for Products T and U using the single plantwide factory overhead rate is $400,000 and $600,000, respectively. The factory overhead cost per unit for Products T and U using activity-based costing is $430,000 and $570,000, respectively.

Step-by-step explanation:

To determine the single plantwide factory overhead rate using direct labor hours as the activity base, divide the total indirect labor cost by the total direct labor hours. In this case, the single plantwide factory overhead rate would be $1,000,000 divided by 50,000, which equals $20 per direct labor hour.

To determine the factory overhead cost per unit for Products T and U using the single plantwide factory overhead rate, multiply the single plantwide factory overhead rate with the number of direct labor hours for each product. For Product T, the factory overhead cost per unit would be $20 multiplied by 20,000 (direct labor hours), which equals $400,000. For Product U, the factory overhead cost per unit would be $20 multiplied by 30,000 (direct labor hours), which equals $600,000.

Activity rate for plant supervision is calculated by dividing the total plant supervision cost by the total direct labor hours. In this case, the activity rate for plant supervision would be $700,000 divided by 50,000, which equals $14 per direct labor hour. The activity rate for setup labor is calculated by dividing the total setup labor cost by the total number of setups. In this case, the activity rate for setup labor would be $300,000 divided by 400 (number of setups), which equals $750 per setup.

To determine the factory overhead cost per unit for Products T and U using activity-based costing, multiply the activity rate for plant supervision with the number of direct labor hours for each product, and add it to the activity rate for setup labor multiplied by the number of setups for each product. For Product T, the factory overhead cost per unit would be ($14 multiplied by 20,000) + ($750 multiplied by 200), which equals $280,000 + $150,000, or $430,000. For Product U, the factory overhead cost per unit would be ($14 multiplied by 30,000) + ($750 multiplied by 200), which equals $420,000 + $150,000, or $570,000.

The factory overhead cost per unit is different for the two products under the two methods because the activity-based costing method allocates the overhead costs based on the specific activities (plant supervision and setup labor) used by each product, whereas the single plantwide factory overhead rate method allocates the overhead costs based on the overall direct labor hours.