Question

The Polaris Company uses a job-order costing system. The following data are taken about the 3,000 units completed for this year:

Allocation Base............Direct Labor Hours
Estimated manufacturing overhead......... $100,000
Actual manufacturing overhead........$110,000
Actual direct labor hours .........50,000
Estimated direct labor hours......... 40,000
Direct material used in production......$60,000
Labor wage rate.......... $17.00 per hours
What is the the unit product cost for this job?

Answer 1

Method 1 is the most cost-effective production method at the original labor cost of $100/unit and remains the best option even when the labor cost rises to $200/unit.

Step-by-step explanation:

The question pertains to choosing the most cost-effective production method for a company that uses a job-order costing system. Given three different methods with varying units of labor and capital, we must calculate the total cost for each method based on the provided costs of labor at $100/unit and capital at $400/unit, then repeat the calculation with an increased labor cost of $200/unit.

For the original costs, the calculation for each method is as follows:

• Method 1: (50 units of labor × $100) + (10 units of capital × $400) = $9,000
• Method 2: (20 units of labor × $100) + (40 units of capital × $400) = $17,000
• Method 3: (10 units of labor × $100) + (70 units of capital × $400) = $28,000

At these costs, Method 1 is the best production method with the lowest total cost of $9,000. If the cost of labor rises to $200/unit, we calculate again:

• Method 1: (50 units of labor × $200) + (10 units of capital × $400) = $13,000
• Method 2: (20 units of labor × $200) + (40 units of capital × $400) = $18,000
• Method 3: (10 units of labor × $200) + (70 units of capital × $400) = $29,000

With the increased labor cost, Method 1 still has the lowest total cost, making it the preferred method.