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Accounting : Overhead Costing

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There are 2 types of storage cabinets, type A and B. The manufacturer applies overhead on all units at rate of $80 per machine hour. Production info is this:
Type A Type B
Anticipated volume (units) 8,000 15,000
Direct material cost $35 $60
Direct labor cost $20 $20

There are three ABC overhead cost activities: manufacturing setups, machine processing, and product shipping. Info on these cost drivers are:

Type A Type B Total
Setup 50 30 80
Machine hours 16,000 22,500 38,500
Outgoing shipments 100 75 175

Total overhead = $3,080,000

That is split into: Manufacturing Setup = $672,000
Machine processing = $1,848,000
Product shipping = $560,000

a. find the unit manufacturing cost of Type A and B cabinets using the current overhead costing procedures.

b. Find the units manufacturing cost of these cabinets using ABC costing.

c.Is type A cabinets overstated or understated by the use of machine hours to allocate manufacturing overhead to production?

d.Should we give a $30 discount on Type A cabinents if the selling price is at $260 right now?

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Solution provided by:
Gaurav Agarwal, MS
Education
  • BE, Bangalore University, India
  • MS, University of Wisconsin-Madison
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