Question 3: Normal Costing Systems (9 Points)
SunDevilCo uses a normal costing system to costs its products. It uses direct labor hours to allocate
overhead. For the fiscal year just ended, SunDevilCo had estimated it would use $400,000 of
overhead. SunDevilCo estimated it would make 20,000 units of its product, Sparky. Each unit of
Sparky takes 4 DLH, at $9/DLH to produce. Each unit of Sparky also takes $15 in direct materials.
1. Calculate the manufacturing overhead allocation rate. (2 pts)
2. Assuming prime costs didn’t differ from estimates, determine the normal cost of one unit of
Sparky. (2 pts)
3. SunDevilCo only made 18,000 units of Sparky for the year, using 72,000 DLH. The total
actually spent on manufacturing overhead was $375,000. Calculate the amount of over/under
applied overhead for the fiscal year. (Be sure to label the amount as over- or under-applied.) (3
pts)
4. What accounting technique should SunDevilCo use to treat the amount of over/underapplied
overhead? (2 pts)
Question 4: Activity-Based Costing (20 Points)
The Manhattan Company manufactures two models of compact disc players, deluxe and regular. The
company has manufactured the regular model for years; the deluxe model was introduced recently to
tap a new segment of the market. Although sales of the deluxe model have been increasing rapidly,
the company’s profits have steadily declined. Management has become increasingly concerned about
the accuracy of its costing system.
The current cost accounting system allocates manufacturing support costs to the two products on the
basis of direct labor hours. For 2002, the company has estimated that it will incur $1 million in
manufacturing support costs and produce 5,000 units of the deluxe model and 40,000 units of the
regular model. The deluxe model requires two hours of direct labor and the regular model one hour.
Direct costs and selling prices per unit are as follows:
Deluxe Regular
Direct Material $45 $30
Direct Labor $20 $10
Selling Price $140 $80
The company is considering switching to an ABC system. A recent cost study revealed the following
activities, costs and product requirements:
Annual Activity Activity Requirements by Product Line
Activity Cost Driver Deluxe Regular
Purchase Orders $ 180,000 Number of Orders 600 400
Quality Control $ 250,000 Number of Inspections 1,000 1,000
Production Set-ups $ 220,000 Number of Set-ups 100 100
Machine Maintenance $ 350,000 Machine Hours 20,000 15,000
$1,000,000
Requirements:
1) Determine the per unit cost of the regular and deluxe model using the current costing system. (4 pts)
