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Benton Corporation manufactures computer microphones, which come in two models: Standard and Premium. Data for a representative quarter for the two models follow:

| | Standard | Premium |
|-------------------|----------|---------|
| Units produced | 18,000 | 4,500 |
| Production runs per quarter | 50 | 25 |
| Direct materials cost per unit | $30 | $64 |
| Direct labor cost per unit | $50 | $75 |

Manufacturing overhead in the plant has three main functions: supervision, setup labor, and incoming material inspection. Data on manufacturing overhead for a representative quarter follow:

| Overhead Category | Amount |
|---------------------|----------|
| Supervision | $371,250 |
| Setup labor | $308,250 |
| Incoming inspection | $310,500 |
| Total overhead | $990,000 |

Required:

a. Benton currently applies overhead on the basis of direct labor cost. What is the predetermined overhead rate for the quarter?

b. The CFO and the plant controller at Benton are thinking of adopting an ABC system. They have tentatively chosen the following cost drivers: direct labor cost for supervision, production runs for setup labor, and direct material dollars for incoming inspection. Compute the cost driver rates for the proposed system at Benton.

c. Compute the unit costs for the two products, Standard and Premium, using the current costing system at Benton (using direct labor costs as the allocation basis for overhead).

d. Compute the unit costs for the two products, Standard and Premium, using the proposed ABC system at Benton.

Note: For all requirements, do not round intermediate calculations. Round your answers to 2 decimal places.

Answer :

The predetermined overhead rate for the quarter can be calculated by dividing the total overhead cost by the total direct labor cost. In this case, the total overhead cost is $990,000 and the total direct labor cost is the sum of the direct labor cost per unit for both the Standard and Premium models, which is $50 for the Standard model and $75 for the Premium model.

Total direct labor cost = (Direct labor cost per unit for Standard * Units produced for Standard) + (Direct labor cost per unit for Premium * Units produced for Premium)
Total direct labor cost = ($50 * 18,000) + ($75 * 4,500)

To find the predetermined overhead rate, divide the total overhead cost by the total direct labor cost:

Predetermined overhead rate = Total overhead cost / Total direct labor cost

b. To compute the cost driver rates for the proposed ABC system, we need to divide the cost driver for each activity by the total activity level for that cost driver. The cost drivers chosen for Benton Corporation are:
- Direct labor cost for supervision
- Production runs for setup labor
- Direct material dollars for incoming inspection

To calculate the cost driver rates, divide the cost driver for each activity by the total activity level for that cost driver.

Cost driver rate for supervision = Supervision cost / Total direct labor cost for supervision
Cost driver rate for setup labor = Setup labor cost / Total production runs
Cost driver rate for incoming inspection = Incoming inspection cost / Total direct material dollars

c. To compute the unit costs for the two products, Standard and Premium, using the current costing system at Benton (using direct labor costs as the allocation basis for overhead), we need to allocate the overhead cost based on the direct labor cost for each model.

Unit cost for Standard = (Direct materials cost per unit + Direct labor cost per unit + (Direct labor cost per unit * Predetermined overhead rate))
Unit cost for Premium = (Direct materials cost per unit + Direct labor cost per unit + (Direct labor cost per unit * Predetermined overhead rate))

d. To compute the unit costs for the two products, Standard and Premium, using the proposed ABC system at Benton, we need to allocate the overhead cost based on the cost driver rates for each activity.

Unit cost for Standard = (Direct materials cost per unit + (Direct labor cost per unit * Cost driver rate for supervision) + (Production runs per quarter * Cost driver rate for setup labor) + (Direct material dollars * Cost driver rate for incoming inspection))
Unit cost for Premium = (Direct materials cost per unit + (Direct labor cost per unit * Cost driver rate for supervision) + (Production runs per quarter * Cost driver rate for setup labor) + (Direct material dollars * Cost driver rate for incoming inspection))

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