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Cost accounting: Activity based costing.

Alpha manufacturing produces two types of entry doors and standard. The assignment basis for the support costs has been direct labor dollars. For 2008 alpha complied the following data for the two products:

deluxe Standard

sales units 50,000 400,000

sales price per unit $650.00 $475.00
Direct material and
labor cost per unit $180.00 $130.00

manufacturing support
costs per unit $30.00 $120.00

Last year Alpha Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. She obtained the following information for 2008.

Activity cost drivers Cost Total Deluxe standard
setups of setups $500,000 500 400 100
machine-related of machine hrs $44,000,000 600,000 300,000 300,000
packing of shipments $5,000,000 250,000 50,000 200,000

a) using the current system, what is estimated
1) total cost of manufacturing one unit for each type of door?
2) profit per unit for each type of door?

b) Using the activity-based costing data presented above.
1) compute the revised total cost to manufacture one unit of each type of entry door
2)compute the profit per unit for each type of door.

c) explain the pros and cons of activity based costing.

Solution Summary

The problem deals with a fundamental aspect of cost accounting: activity based costing.