Question

Maxey & Sons manufactures two types of storage cabinets—Type A and Type B—and applies manufacturing overhead to all units at the rate of $104 per machine hour. Production information follows.

	Type A			Type B
Anticipated volume (units)		20,800			39,000
Direct-material cost per unit	$	20		$	30
Direct-labor cost per unit		25			25

The controller, who is studying the use of activity-based costing, has determined that the firm’s overhead can be identified with three activities: manufacturing setups, machine processing, and product shipping. Data on the number of setups, machine hours, and outgoing shipments, which are the activities’ three respective cost drivers, follow.

	Type A			Type B			Total
Setups		124			84			208
Machine hours		41,600			58,500			100,100
Outgoing shipments		200			150			350

The firm’s total overhead of $10,410,400 is subdivided as follows: manufacturing setups, $2,271,360; machine processing, $6,246,240; and product shipping, $1,892,800.

Required:

1. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company’s current overhead costing procedures.

2. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing.

3. Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?

4. Assume that the current selling price of a Type A storage cabinet is $298.50 and the marketing manager is contemplating a $36 discount to stimulate volume. Is this discount advisable?

Answer 1

1.Unit manufacturing cost using current system:
	Type A	Type B
Direct Material per Unit	20	30
Direct Labor per Unit	25	25
Overhead per unit	208	156
Unit Manufacturing Cost	253	211
2. Using ABC
	Type A	Type B
Direct Material per Unit	20	30
Direct Labor per Unit	25	25
Overhead per unit	241.9	137.92
Unit Manufacturing Cost	286.9	192.92
Calculation of overhead cost per unit
	Type A	Type B
Set up	1,354,080	917,280
Machine processing	2,595,840	3,650,400
Product shipping	1,081,600	811,200
Total overhead cost	5,031,520	5,378,880
Number of units	20,800	39,000
Cost per Unit	241.9	137.92
3.It is understated by $286.9-253 = $33.9
4.No, the discount is not advisable as ABC cost per unit is $286.9 and selling price will fall below cost

Type B А 1 1.Unit manufacturing cost using current system: 2 Type A 3 Direct Material per Unit 20 4 Direct Labor per Unit 25 5 Overhead per unit =41600*104/20800 6 Unit Manufacturing Cost =SUM(B3:35) 30 25 =104*58500/39000 =SUM(C3:05) =C3 8 2. Using ABC 9 | Type A Type B 10 Direct Material per Unit =B3 11 Direct Labor per Unit =B4 1=C4 12 Overhead per unit I=B22 1=C22 13 Unit Manufacturing Cost =SUM(B10:B12) I=SUM(C10:C12) 14 15 Calculation of overhead cost per unit 16 Type A Туре в 17 Set up =2271360*124/208 1=2271360*84/208 18 Machine processing =6246240*41600/100100)=6246240*58500/100100 19 Product shipping = 1892800*200/350 =1892800*150/350 20 Total overhead cost =SUM(B17:B19) =SUM(C17:C19) 21 Number of units 20800 39000 22 Cost per Unit =B20/B21 =C20/021 23 24 3.It is understated by $286.9-253 = $33.9 25 4.No, the discount is not advisable as ABC cost per unit is $286.9 and selling price will fall below cost