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Activity Based Costing

Applies manufacting overhead to all units at the rate of $80 per mahcine hours.
Deluxe Executive
Direct material cost $40 $65
Direct labor cost 25 25
Budgetedc volume (units) 16,000 30,000

The controller, who is studying the use of activity-based acosting, 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.

Deluxe Executive Total
Setups 100 60 160
Machine hours 32,000 45,000 77,000
Outgoing shipments 200 150 350

The firm's total overhead of $6,160,000 is subdivded as follows: manufacturing setups, $1,344,000; machine processing, $3,696,000 and product shipping $1,120,000.

Required
1. Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using the company's current overhead costing procedures.
2. Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using activity based costing.
3. Is the cost of the Deluxe filing cabinet overstated or understated (I.e. distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?
4. Calculate the aggregate amount by which the Deluxe caninet line is undercosted by the company's current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system overcosts the Executive cabinet line.
5. Assume that the current selling price of a Deluxe filing cabinet is $270 and the marketing manager is contemplating a $30 discount to stimulate volume. Is this discount advisable? Briefly discuss.

Question from: ISBN 0072502878, Managerial Accounting: Creating Value in a Dynamic Business Environment, Ronald W. Hilton, 6E

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Solution Summary

Computes unit manufacturing cost using traditional costing and activity costing and identifies the distortions in costing.

$2.19