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# Activity Based Costing for Maxey and Sons Manufacturing

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 3 activities: manufacturing setups, machine processing, and product shipping.

Data on the number of setups, machine hours, and outgoing shipments, which are the activities 3 respective cost drivers, follows.
Type A Type B Total
Set ups..................... 50 30 80
Machine hours............16,000 22,500 38,500
Outgoing shipments....... 100 75 175

The firms's total overhead of \$3,080,000 is subdivided as follows:
Manufacturing setups \$672,000
Machine processing \$ 1,848,000
Product shipping \$560,000

1. Compute the unit manufacturing cost of TypeA 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 overstate or unstated by the use of machine hours to allocate total manufacturing overhead to production? By how much?
4. Assume that the selling price of Type A storage cabinet is \$260 and the marketing manager is contemplating a \$30 discount to stimulate volume. Is this discount advisable - explain.

#### Solution Preview

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 3 activities: manufacturing setups, machine processing, and product shipping.

Data on the number of setups, machine hours, and outgoing shipments, which are the activities 3 respective cost drivers, follows.
Type A Type B Total
Set ups..................... 50 30 80
Machine hours............16,000 22,500 38,500
Outgoing shipments....... 100 75 175

The firms's total overhead of \$3,080,000 is subdivided as follows:
Manufacturing setups \$672,000
Machine processing ...

#### Solution Summary

The solution calculates unit manufacturing cost by using the company's current overhead costing procedures and using activity based costing.

\$2.19