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# ABC - Maxey & Sons

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Maxey & Sons manufactures two types of storage cabinets - Type A and Type B - and applies manufacturing overhead to all units at the rate of \$80 per machine hour. Production information follows.

Type A Type B
Anticipated volume (units) 8,000 15,000

Direct-material cost \$35 \$60
Direct-labor cost 20 20

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 50 30 80
Machine hours 16,000 22,500 38,500
Outgoing shipments 100 75 175

The firm's total overhead of \$3,080,000 is subdivided as follows: manufacturing setups, \$672,000; machine processing, \$1,848,000; and product shipping, \$560,000.

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 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 \$260 and the marketing manager is contemplating a \$30 discount to simulate volume. Is the discount advisable? Briefly discuss.

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