Question

Rehm company manufactures a product that is available in both a deluxe model and a regular model. the company has manufactured the regular model for years. the deluxe model was introduced several years ago to tap a new segment of the market. since the introduction of the deluxe model, the company's profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing of the deluxe model have been increasing rapidly. manufacturing overhead is assigned to products on the basis of direct labor-hours. for the current year, the company has estimated that it will incur $6,000,000 in manufacturing overhead cost and produce 15,000 units of the deluxe model and 120,000 units of the regularmodel. the deluxe model requires 1.6 hours of direct labor time per unit, and the regular model requires 0.8 hours. material and labor costs per unit are as follows: deluxe regular direct materials $154 $112 direct labor $16 $8 management is considering using activity-based costing to apply manufacturing overhead costs to products for external financial reports. the activity-based costing system would havethe following four activity cost pools: activity cost pool activity measure estimated overhead costs purchase orders number of purchase orders $252,000 scrap/rework orders number of scrap/rework orders 648,000 product testing number of tests 1,350,000 machine-related machine-hours 3,750,000 total overhead cost $6,000,000 expected activity activity measure deluxe regular total number of purchase orders 400 800 1,200 number of scarp/rework orders 500 400 900 number of tests 6,000 9,000 15,000 machine-hours 20,000 30,000 50,000 required: 1. using direct labor-hours as the base for assigning manufacturing overhead cost to products, compute the predetermined overhead rate. 2. using the predetermined overhead rateand other data from the problem, determine the unit product cost of each model. 2. compute the total amount of manufacturing overhead cost that would be applied to each mode

Answer 1

1. The predetermined overhead rate using direct labor-hours as the base is $15 per direct labor-hour.

2. The unit product cost for the deluxe model is $199.20, and for the regular model, it is $124.80.

Step-by-step explanation:

1. To calculate the predetermined overhead rate, divide the estimated manufacturing overhead costs by the total direct labor-hours. In this case, the formula is: $6,000,000 / (15,000 DLH deluxe + 120,000 DLH regular) = $15 per direct labor-hour.

2. The unit product cost is determined by adding the direct materials cost, direct labor cost, and the allocated manufacturing overhead cost per unit. For the deluxe model: $154 (direct materials) + $16 (direct labor) + ($15 x 1.6 DLH) = $199.20. For the regular model: $112 (direct materials) + $8 (direct labor) + ($15 x 0.8 DLH) = $124.80.

In the explanation, it's essential to highlight the choice of using direct labor-hours for the predetermined overhead rate and explain how it aligns with traditional costing methods. The breakdown of unit product costs should emphasize the inclusion of allocated manufacturing overhead costs and showcase the impact on the total cost for each model. This approach provides clarity on how costs are assigned and contributes to informed decision-making by management.