For many years, Gorski Company manufactured a single product called a mono-circuit. Then, three years ago, the

Question:

For many years, Gorski Company manufactured a single product called a mono-circuit. Then, three years ago, the company automated a portion of its plant and at the same time introduced a second product called a bi-circuit that has become increasingly popular. The bi-circuit product is a more complex product than the mono-circuit, requiring two hours of direct labor time per unit to manufacture, and extensive machining in the automated portion of the plant. In addition, it requires numerous inspections to ensure that high quality is maintained. The mono-circuit requires only one hour of direct labor time per unit, only a small amount of machining, and few quality control checks. Manufacturing overhead costs are assigned to the products on the basis of direct labor-hours.
Despite the growing popularity of the company€™s new bi-circuit, profits have declined steadily. Management is beginning to believe that the company€™s costing system may be faulty. Unit costs for materials and labor for the two products follow:

Management estimates that the company will incur $3,000,000 in manufacturing overhead costs during the current year and that 40,000 units of the mono-circuit and 10,000 units of the bi-circuit will be produced and sold.

Required:
1. Compute the predetermined overhead rate assuming that the company continues to apply manufacturing overhead cost to products on the basis of direct labor-hours. Using this rate and other data from the problem, determine the unit product cost of each product.
2. Management is considering using activity-based costing to apply manufacturing overhead cost to products for external financial reports. Some preliminary work has been done and the data that have been collected are displayed below in the form of an Excel spreadsheet.

Determine the predetermined manufacturing overhead rate (i.e., activity rate) for each of the four activity cost pools.
3. Using the predetermined manufacturing overhead rates that you computed in part (2) above, do the following:
a. Determine the total amount of manufacturing overhead cost that would be applied to each product using the activity-based costing system. After these totals have been computed, determine the amount of manufacturing overhead cost per unit of each product.
b. Compute the unit product cost of each product.
4. Look at the data you have computed in parts (1) through (3) above. In terms of manufacturing overhead cost, what factors make the bi-circuit more costly to produce than the mono-circuit? Is the bi-circuit as profitable as the company thinks it is?Explain.