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# Traditional Costing and Activity-Based Costing

The current cost accounting system allocates manufacturing support costs to to the the two products on the basis of direct labor hours. The company has estimated that this year it will incur \$1M in manufacturing support costs and will produce 5,000 units of the deluxe model and 40,000 units of the regular model. The deluxe model requires 2 hours of direct labor, and the regular model requires 1 hour.

Item Deluxe Regular
Direct materials cost \$45 \$30
Direct Labor cost 20 10
Selling Price 140 80

(a) Compute the manufacturing support cost driver rate for this year.
(b) Determine the cost to maufacture one unit of each model.
(c) The company has decided to trace manufacturing support costs traceable to the four activities this year.

Cost Driver Units Demanded
Activity Cost Driver Cost Total Deluxe Regular
Purchase Orders No. of orders \$180,000 600 200 400
Quality Control No. of Inspections 250,000 2000 1000 1000
Product Setups Number of setups 220,000 200 100 100
Machine maintenance Machine hours 350,000 35,000 20,000 15,000

Compute the total cost to manufacture one unit of each model.
(d) Compare the manufacturing activity resources demanded per unit of the regualer model and per unit of the deluxw model. Why did the old costing system undercost the deluxe model?
(e) Is the deluxe model as profitable as the company thinks it is under the old costing system? Explain.
(f) What should the Manhattan Company do to improve its profitability? Consider pricing and product-level changes among your suggest. Who should be involved in implementing your recommendations?

#### Solution Preview

(a) Compute the manufacturing support cost driver rate for this year.
Deluxe 10000
Regular 40000
direct labor hours 50000

(b) Determine the cost to maufacture one unit of each model.
DELUXE
Direct materials 45
Direct labor 20