Question

Franklin Furniture Incorporated (FFI) manufactures bedroom furniture in sets (a set includes a dresser, two queen-size beds, and one bedside table) for use in motels and hotels. FFI has three customer groups, which it calls the value, quality, and luxury groups. The value products are targeted to low-price motels that are looking for simple furniture, while the luxury furniture is targeted to the very best hotels. The value line is attractive to a variety of hotels and motels that appreciate the combination of quality and value. Currently there has been a small increase in the quality and value lines, and an appreciable increase in demand in the luxury line, reflecting cyclical changes in the marketplace. Luxury hotels are now in more demand for business travel, while a few years ago, the value segment was the most popular for business travelers. FFI wants to be able to respond to the increased demand with increased production but worries about the increased production cost and about price setting as its mix of customers and production changes. FFI has used a volume-based overhead allocation rate based on direct labor hours for some time. Direct labor cost is $15 per hour.

 

 

	Budgeted Cost	Cost Driver
Materials handling	$ 349,600	Number of parts
Product scheduling	160,000	Number of production orders
Setup labor	216,000	Number of setups
Automated machinery	1,750,000	Machine hours
Finishing	619,500	Direct labor hours
Pack and ship	290,400	Number of orders shipped
	$ 3,385,500
General, selling, and administrative costs	$ 5,000,000

 

The budgeted production data for the three product lines follow.

 

Product Lines	Value	Quality	Luxury
Sets produced	15,000	5,000	600
Price	$ 650	$ 900	$ 1,200
Direct materials cost per set	$ 80	$ 50	$ 110
Number of parts per set	30	50	120
Direct labor hours per set	4	5	7
Machine hours per set	3	7	15
Production orders	50	70	200
Production setups	20	50	50
Orders shipped	1,000	2,000	300
Number of inspections	2	6	14

 

Part 1 (Static)

Required:

1. Determine the cost per set and the total production cost of each of the three customer groups using activity-based costing.

2. Determine the production cost for each of the three customer groups using FFI’s current volume-based approach.

(For all requirements, round your intermediate calculations and final answers 2 decimal places.)

Answer 1

Explanation

1.

First, obtain the total levels for the activity cost drivers, as follows:
 

Product Lines	Value	Quality	Luxury	Total
Sets Produced	15,000	5,000	600	20,600
Number of Parts per set	30	50	120
Total parts				772,000
Direct Labor Hours per set	4	5	7
Total Labor hours				89,200
Machine Hours per set	3	7	15
Total Machine Hours				89,000
Production Orders	50	70	200	320
Production Setups	20	50	50	120
Orders Shipped	1,000	2,000	300	3,300

 

Next, obtain the activity rates, as follows:
 

Budgeted Cost		Cost Driver		Activity Rate
Materials handling	$ 349,600	Number of Parts	$ 0.45	= $ 349,600 ÷ 772,000
Product Scheduling	$ 160,000	Number of Production orders	$ 500.00	= 160,000 ÷ 320
Setup Labor	$ 216,000	Number of setups	$ 1,800.00	= 216,000 ÷ 120
Automated Machinery	$ 1,750,000	Machine hours	$ 19.66	= 1,750,000 ÷ 89,000
Finishing	$ 619,500	Direct labor hours	$ 6.95	= 619,500 ÷ 89,200
Pack and Ship	$ 290,400	Number of orders shipped	$ 88.00	= 290,400 ÷ 3,300

 

Direct Labor Rate $15.00

 

Finally, determine ABC unit and total costs, as follows:

Determine total activity-driver use

 

	Value	Quality	Luxury	Total
Number of Parts	450,000	250,000	72,000	772,000
Number of Production orders	50	70	200	320
Number of setups	20	50	50	120
Machine hours	45,000	35,000	9,000	89,000
Direct labor hours	60,000	25,000	4,200	89,200
Number of orders shipped	1,000	2,000	300	3,300

 

then multiple the respective activity-driver use by the activity-driver rates and add in the directly traceable costs
 

 

	Value	Quality	Luxury
Direct Materials	$ 1,200,000	$ 250,000	$ 66,000
Direct Labor	900,000	375,000	63,000
Overhead:
Materials handling	$ 202,500	$ 112,500	$ 32,400
Product scheduling	25,000	35,000	100,000
Setup labor	36,000	90,000	90,000
Automated machinery	884,700	688,100	176,940
Finishing	417,000	173,750	29,190
Pack and ship	88,000	176,000	26,400
Total ABC Overhead	$ 1,653,200	$ 1,275,350	$ 454,930
Total ABC Cost	$ 3,753,200	$ 1,900,350	$ 583,930
Unit ABC Cost	$ 250.21	$ 380.07	$ 973.22

 

2.

Volume-based Costing Results

 

Rate for Direct Labor Hours $37.95 = $3,385,500 ÷ 89,200 rounded off to 2 decimal places.

 

	Value	Quality	Luxury
Direct materials	$ 1,200,000	$ 250,000	$ 66,000
Direct labor	900,000	375,000	63,000
Overhead	$ 2,277,000	948,750	159,390
Total cost unit	$ 4,377,000	$ 1,573,750	$ 288,390
Cost per unit	$ 291.80	$ 314.75	$ 480.65

 

Overhead is direct labor overhead rate × direct labor hours