Question

Jumbo Ltd. produces two types of office desks classified as Executive and Elite. The company uses simple job-costing system that has two direct-cost categories (direct materials and direct labour). Regarding indirect costs, the company uses a single indirect-cost pool of machine hours to allocate the indirect cost. For 2020, Jumbo Ltd. estimates its manufacturing overhead costs and machine hours to be $144,000 and 4,500 hours respectively. Jumbo Ltd. collected the following information for 2020.

	Executive desk			Elite desk
Number of desks	250 desks			200 desks
Machine hours per desk	10			10
Price per desk	$900			$1,200
Cost of materials per desk	$200			$ 300
Direct labour costs per desk	$180			$ 410

Required (show your workings):

(a)	Using the simple costing system, calculate the product cost per unit for the Executive and Elite desks.
(b)	Assumed Jumbo Ltd. incurred actual total manufacturing costs of $161,000 and 4,600 total machine hours during the year. Determine the amount of under applied or over applied manufacturing overhead for the period and prepare a journal entry to close any balance in the manufacturing overhead account assuming the under/over applied overhead amount is insignificant.
(c)	Jumbo Ltd. is concerned about the accuracy of the costs assigned to Executive and Elite desks and therefore plan to implement an activity-based costing (ABC) system. Jumbo Ltd.’s ABC system would have the same direct-cost categories as its simple costing system. However, instead of a single indirect cost pool, there would now be three categories (design, setup and printing machine operations) for assigning indirect costs. To examine how activity-based costing affect the costs of Executive and Elite desks, Jumbo Ltd. Collected the following information on the assumption that 250 units of Executive and 200 units of Elite are manufactured during the year.

Activity	Costs	Cost Allocation Base	Quantity of Cost Allocation Base
			Executive desk	Elite desk
Design	$60,000	Design hours	800 hours	3,200 hours
Setups	39,000	No of setups	10 setups	40 setups
Machine operation	45,000	Machine hours	2,500 hours	2,000 hours
	$144,000

	Using the activity based costing system, calculate the estimated product cost per unit for Executive and Elite desks.
(d)	Compare the unit costs of Executive and Elite desks under simple and activity based costing system. Explain why the cost of Executive and Elite desks differ under simple and activity based costing.
(e)	Explain how Jumbo Ltd. might use the new cost information from its activity based costing system to better manage its business.

Answer 1