Chapter 3 Case Marble, Inc. manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduce

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Chapter 3 Case

Marble, Inc. manufactures a product that is available in both a flexible and a rigid model. The company has made the rigid model for years; the flexible model was introduced several years ago to tap a new segment of the market. Since introduction of the flexible model, the company’s profits have steadily declined, and management has become concerned about the accuracy of its costing system. Sales of the flexible model have been increasing rapidly.

Overhead is applied to products on the basis of direct labor-hours. At the beginning of the current year, management estimated that $600,000 in overhead costs would be incurred and the company would produce and sell 1,000 units of the flexible model and 10,000 units of the regular model. The flexible model requires 2 hours of direct labor time per unit, and the regular model requires 1 hour.

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Direct materials and labor costs per unit are given below:

                                                             Flexible   Rigid

Direct materials cost per unit………… $110.00  $80.00

Direct labor cost per unit…………….. $30.00    $15.00

Required:

1. (2 points) Compute the predetermined overhead rate using direct labor-hours as the basis

for allocating overhead costs to products. Compute the unit product cost for one unit of each model.

2. (2 points) An intern suggested that the company use activity-based costing to cost its products. A team was formed to investigate this idea. It came back with the

recommendation that four activity cost pools be used. These cost pools and their associated activities are listed as follows:

                                                                 Estimated Expected           Activity

Activity Cost Pool and Activity Measure   Overhead Cost   Flexible  Rigid  Total

Purchase orders (number of orders)……… $ 20,000             100      300     400

Rework requests (number of requests)…… 10,000                 60       140     200

Product testing (number of tests)………… 210,000                900     1,200  2,100

Machine related (machine-hours)………… 360,000              1,500    2,500  4,000

                                                                   $600,000

Compute the activity rate for each of the activity cost pools.

3. Using activity-based costing, do the following:

a. (2 points) Determine the total amount of overhead that would be assigned to each

model for the year.

b. (2 points) Compute the unit product cost for one unit of each model.

4. (2 points) Identify a possible explanation for the company’s declining profit based on an analysis of your results from requirements 1-3.

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