Question

A clothing line manufactures two types of suits—Hand made and Machine made—and applies manufacturing overhead to all units using direct labor hours.

Production information follows.

Anticipated volume (units):

Hand Made: 31,000

Machine Made: 58,000

Direct-material cost per unit:

Hand Made: $ 75

Machine Made: $45

Direct-labor cost per unit $15 per hour

Hand made = 4 hours per suit; total hours for HM 124,000

Machine made = 2 hours per suit; total hours for MM 116,000

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.

Set Up:

Hand Made: 176.

Machine Made: 136

Set up Total 312

Machine hours

Hand Made: 62,400

Machine Made:87,750

Machine Hour Total:150,150

Outgoing shipments

Hand Made:150

Machine Made: 200

Shipment totals: 350

The firm's total overhead of $23,423,400 is subdivided as follows: manufacturing setups, $5,110,560; machine processing, $14,054,040; and product shipping, $4,258,800.

Current sales price is the following based on using DL hours for MOH. $     Hand Made:650.00 Machine Made $ 290.00

Q1 Which method should the company use and why? List at least 3 reasons why.

Q2 If the company decides to use ABC, should the company change the sales price for each suit? What should it be based on?

Answer 1