Question

T&J manufacturing has a factory that produces custom kitchen cabinets. It has multiple product lines. Materials and labor for the cabinets are determined by each job. To simplify the assignment, we will assume the following average costs. The materials include $1,000 for the wood and other direct materials of $200. Both items listed are on a per job basis. It requires 20 hours of labor on average for a custom kitchen. The hourly rate is $10. The sales price will be set at a markup of 65%. The company estimates that it will have 16,000 direct labor hours in total for all product lines. It assumes 800 units are sold on average per year. A breakdown of estimated yearly costs related to the kitchen cabinets follows: Salaries- office & administrative $ 520,000 Salaries for factory personal: $ 220,000 Office Rent $ 125,000 Factory Rent $ 20,000 Office Utilities and Misc office expenses(based on units sold) $ 20,000 Sales Travel(based on units sold) $ 24,000 Insurance - office $ 12,000 Depreciation - office equipment $ 40,000 Depreciation for factory equipment $ 70,000 Advertising $ 20,000 Sales commissions(based on units sold) $ 45,000 Factory Property taxes: $ 10,000 Maintenance for factory equipment: $ 80,000

1. Determine the cost of manufacturing one custom kitchen assuming the units given. Assume the MOH costs are allocated based on the direct labor hours per unit. Please show all calculations and round to the nearest dollar. I would recommend that you calculate the MOH per kitchen first. Discuss other options (at least 2 options) for the activity base and the importance of the MOH allocation. Do multiple product lines impact the MOH allocation? What happens if MOH is not allocated correctly?

Answer 1

Cost of Manufacturing per kitchen
Particulars		amount $
Material Cost
Wood		1000
Other direct materials		200
Direct Labour	20*10=	200
other manufacturing cost
salaries factory personnel	(220000/16000)*20	275
factory rent	(20000/16000)*20	25
depreciation factory equipment	(70000/16000)*20	87.5
factory property taxes	(10000/16000)*20	12.5
maintenance factory equipment	(80000/16000)*20	100
total cost of manufacturing		1900

importance of MOH allocation

MOH allocation helps in decision making for the company specially pricing decisions.

It also helps different departments to improve efficiency and reduce overhead costs.

Other options for activity base are :

1) allocation on the basis of units manufactured of different products in product line

2) allocation on the basis of sales of different products in product line.

Yes different product lines impact the allocation of MOH.

If MOH is not allocated correctly it may affect the price of products and also show improper profits of different products in the product line. it may impact the decision making regarding product manufacturing.