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Sample Question: Activity Based Costing

1. Mahogany Manufacturing produces two types of entry doors: deluxe and standard. The assignment basis for support costs has direct labor dollars. For 2001, Mahogany compiled 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 costs per unit $180.00 $130.00
Manufacturing support costs per unit $80.00 $120.00

Last year, Mahogany Company 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 ABC information for 2001:

Setups # setups $500,000 500 400 100
Machine related # of machine hours $44,000,000 600,000 300,000 300,000
Packing # shipments $5,000,000 250,000 50,000 200,000

a. Using the current system, what is the estimated:
i. Total cost of manufacturing one unit for each type of labor
ii. Profit per unit for each type of labor

b. Using the current system, estimated manufacturing support costs per unit are less for the deluxe door ($80 per unit) than the standard door ($120 per unit). What is the likely explanation for this?
c. Review machine related costs above. What is a likely explanation for this?
d. Using activity based costing data presented above:
i. Compute the cost driver rate for each support activity
ii. Compute the revised manufacturing support cost per unit for each type of entry door
iii. Compute the revised total cost to manufacture one unit of each type of entry door.

e. Is the deluxe door as profitable as the original data estimated? Why or why not?
f. What considerations need to be examined when determining a sales mix strategy?


Solution Preview

Please see the atached excel file.
<br>Have used cell ...

Solution Summary

The total cost and profit of the current system is determined.