Merkel Industries Has a Traditional Costing System in Which It

Essay

Merkel Industries has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Large and Small, about which it has provided the following data:
$\begin{array}{lrrr}&\text { Large}&\text { Small}\\\text { Direct materials per unit } & \$ 17.80 & \$ 55.40 \\\text { Direct labor per unit } & \$ 16.10 & \$ 55.20 \\\text { Direct labor-hours per unit } & 0.70 & 2.40 \\\text { Annual production } & 30,000 & 15,000\end{array}$
The company's estimated total manufacturing overhead for the year is $1,793,790 and the company's estimated total direct labor-hours for the year is 57,000.
The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below:
$$\begin{array} { l r } \text { Activities and Activity Meas.ires } & \text { Estirnated Overhead Cost } \\\text { Supporting direct labor (DLHs) } & 2 8 5 , 0 0 0 \\\text { Setting up machines (setups) } & 437,190 \\\text { Parts adrinistration (part types) } & \underline{1,071,600} \\\text { Total } & \underline{\$ 1,793,790}\end{array}$$
$$\begin{array} { | l | r | r | r | } \hline \text { Activities } & \text { Large } & \text { Small } & \text { Total } \\\hline \text { Supporting direct labor } & 21,000 & 36,000 & 57,000 \\\hline \text { Setting up machines } & 798 & 2,565 & 3,363 \\\hline \text { Parts adrninistration } & 1,539 & 1,140 & 2,679 \\\hline\end{array}$$
Required:
a. Determine the unit product cost of each of the company's two products under the traditional costing system.
b. Determine the unit product cost of each of the company's two products under activity-based costing system.