Question

Maxey & Sons manufactures two types of storage cabinets—Type A and Type B—and applies manufacturing overhead to all units at the rate of $112 per machine hour. Production information follows.

	Type A			Type B
Anticipated volume (units)		22,400			42,000
Direct-material cost per unit	$	24		$	36
Direct-labor cost per unit		29			29

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.

	Type A			Type B			Total
Setups		132			92			224
Machine hours		44,800			63,000			107,800
Outgoing shipments		200			150			350

The firm’s total overhead of $12,073,600 is subdivided as follows: manufacturing setups, $2,634,240; machine processing, $7,244,160; and product shipping, $2,195,200.

Required:

1. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company’s current overhead costing procedures.

2. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing.

3. Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?

4. Assume that the current selling price of a Type A storage cabinet is $332.50 and the marketing manager is contemplating a $38 discount to stimulate volume. Is this discount advisable?

Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company’s current overhead costing procedures.

	Type A Type B Unit manufacturing costs

Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing. (Round activity based application rates, overhead application and the final answers to 2 decimal places.)

	Type A Type B Unit manufacturing costs

• Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much? (Do not round intermediate calculations. Round activity based application rates, overhead application and the final answers to 2 decimal places.)

  	Type A store cabinet line is

• Assume that the current selling price of a Type A storage cabinet is $332.50 and the marketing manager is contemplating a $38 discount to stimulate volume. Is this discount advisable?

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Answer 1

ANSWER 1:

Manufacturing cost as per Companys current overhead procedure

Particulars TYPE A $ TYPE B $ Material cost 24 36 Labour cost 29 29 Manufacturing Overhead 224 168 UNIT COST 277 233

TYPE A manufacturing overhead = (112$ per Machine hours* Machine hours of A ) / No. of Units of A

                                                     = 112 * 44800 / 22400

                                                    = 224$ per unit of A

TYPE B Manufacturing overhead =(112$ per Machine hours* Machine hours of B ) / No. of Units of B

                                                     (112$ * 63000) / 42000 = 168$ per unit of TYPE B

2 . Activity Based Costing

Activity based per activity cost

Activity	Total Activity Cost $	Activity Driver	Per activity application rate	TYPE A in $	TYPE B in $
Manufacturing Setups	2634240	224 setups	11760 per setup (2634240/224)	1552320 (11760$ * 132setups of A)	1081920 (11760$ * 92 setups of B)
Machine Processing	7244160	107800 Hours	67.20 per Hour (7244160/107800)	3010560 (67.20$ *44800 Hours of A)	4233600 (67.20$*63000 Hours of B)
Product shipping	2195200	350 outgoing shipments	6272 per outgoing shippment (2195200/350)	1254400 (6272$ * 200 shipments of A)	940800 (6272*150)
Total Manufacturing overhead	12073600			5817280	6256320

ANSWER 2 :

           UNIT MANUFACTURING COST BY ACTIVITY BASED COSTING

Particulars	TYPE A $	TYPE B $
MAterial cost	24	36
Labour cost	29	29
Manufacturing Overhead	259.70 5817280/22400)	148.96 (6256320/42000)
UNIT COST	312.70	213.96

ANSWER 3 :

overstated / (understated) manufacturing overhead of type A

Total Manufacturing over head of Type A as per Answer 1 -Total Manufacturing Over head of type A as per Answer 2

=224$ - 259.70$

= -35.70$

UNDERSTATED BY 35.70$

ANSWER 4 .:

PROFIT / -LOSS PER UNIT OF TYPE A IF 38$ IS GIVEN AS DISCOUNT

= (332.50-38) -312.7

=294.5 - 312.7

= - 18.20

THERE IS LOSS OF $ 18.20 PER UNIT IF $38 IS GIVEN AS DISCOUNT SO THEGIVEN DISCOUNT OF $38 IS NOT ADVISABLE.