Midwest Industrial Products Corporation makes two products, Product H and Product L. Product H is expected to sell 50,000 units next year and Product L is expected to sell 10,000 units. A unit of either product requires 0.2 direct labor hours.
The company's total manufacturing overhead for the year is expected to be $1,920,000.
Required
1. The company currently applies manufacturing overhead to products using direct labor hours as the allocation base. If this method is followed, how much overhead cost would be applied to each product? Compute both the overhead cost per unit and the total amount of overhead cost that would be applied to each product. (In other words, how much overhead cost is applied to a unit of Product H? Product L? How much overhead cost is applied in total to all the unit of Product H? Product L?)
2. Management is considering an activity based costing system and would like to know what impact this change might have on product costs. For purpose of discussion, it has been suggested that all of the manufacturing overhead be treated as a product level cost. The total assigned to Product H and $960,000 assigned to Product L.
If this suggestion is followed, how much overhead cost per unit would be applied to each product?
3. Explain the impact on unit product costs of the switch in costing systems?