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:
$$\begin{array} { | l | r | r | } \hline \text { Direct materials } & \text { Large } & \text { Small } \\\text { per unit }&\$17.80&\$55.40\\\hline\text { Direct labor per } & \$ 16.10 & \$ 65.20 \\\text { unit } & & \\\text { Direct labor-hours } & 0.70 & 2.40 \\\text { per unit } & & \\\hline \text { Annual production } & 30,000 & 15,000\\\hline\end{array}$$

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:
$$\begin{array} { | l | r | } \hline \text { Activities and Actirity } & \text { Estimated Overhead } \\\text { Measures } & \text { Cost } \\\text { Supporting direct labor (DLHs) } & \$ 285,000 \\\hline \text { Setting up machines (setups) } & 437,190 \\\hline \text { Parts administration (part } & 1,071,600 \\ \text { types) } & \\\hline \text { Total } &\underline{ \$ 1,793,790 }\\\hline\end{array}$$
$$\begin{array} { | l | r | r | r | } \hline \text { Acturities } & \text { Large } & \text { Small } & \text { Total } \\\hline \text { Supporting direct labor } & 21,000 & 36,000 & 57,000 \\\hline \text { Setting up machines } & 798 & 2,565 & 3,363 \\\hline \text { Parts administration } & 1,539 & 1,140 & 2,679 \\\hline\end{array}$$
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.