Question

A clothing line manufactures two types of suits—Hand made and Machine made—and applies manufacturing overhead to all units using direct labor hours.

Production information follows.

Anticipated volume (units):

Hand Made: 31,000

Machine Made: 58,000

Direct-material cost per unit:

Hand Made: $ 75

Machine Made: $45

Direct-labor cost per unit $15 per hour

Hand made = 4 hours per suit; total hours for HM 124,000

Machine made = 2 hours per suit; total hours for MM 116,000

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

Set Up:

Hand Made: 176.

Machine Made: 136

Set up Total 312

Machine hours

Hand Made: 62,400

Machine Made:87,750

Machine Hour Total:150,150

Outgoing shipments

Hand Made:150

Machine Made: 200

Shipment totals: 350

The firm's total overhead of $23,423,400 is subdivided as follows: manufacturing setups, $5,110,560; machine processing, $14,054,040; and product shipping, $4,258,800.

Current sales price is the following based on using DL hours for MOH. $     Hand Made:650.00 Machine Made $ 290.00

Questions:

1. Compute the per unit manufacturing cost of Hand Made and Machine Made by using the company's current overhead costing procedures using Direct labor hours for applied MOH.

2. Compute the per unit manufacturing cost of Hand Made and Machine Made by using activity-based costing.

3.Which method should the company use and why? List at least 3 reasons why.

4. If the company decides to use ABC, should the company change the sales price for each suit? What should it be based on?

Answer 1

1	Traditional costing	Based on direct labor hours
	Total manufacturing cost	23423400
	Total direct labor hours	240000	(124000+116000)
	Predetermined OH rate	97.5975
		Hand made	Machine made
	Predetermined OH rate	97.5975	97.5975
	Direct Labor hours	124000	116000
	Manufacturing overheads	12102090.00	11321310.00
	Number of units	31000	58000
	Unit cost	390.39	195.195
	Particulars	Hand made	Machine made
	Direct material	75	45
	Direct labor	60	30
	Manufacturing overheads	390.39	195.20
	manufacturing cost per unit	525.39	270.20
2	ABC system	Estimated cost	Cost driver	Cost per driver
	manufacturing setups	5110560	312	16380
	machine processing	14054040	150150	93.6
	product shipping	4258800	350	12168
		23423400
	ABC system	Cost driver	Driver hand made	Total cost
	manufacturing setups	16380	176	2882880
	machine processing	93.6	62400	5840640
	product shipping	12168	150	1825200
	Total overheads			10548720
	Number of units			31000
	Cost per unit			340.28
	ABC system	Cost driver	Driver machine made	Total cost
	manufacturing setups	16380	136	2227680
	machine processing	93.6	87750	8213400
	product shipping	12168	200	2433600
	Total overheads			12874680
	Number of units			58000
	Cost per unit			221.98
	Particulars	Hand made	Machine made
	Direct material	75	45
	Direct labor	60	30
	Manufacturing overheads	340.28	221.98
	manufacturing cost per unit	475.28	296.98