Question

Norwegian Furniture Manufacturing makes two models of office chairs: regular and deluxe. Summary data for the two products showed the following:

Unit Costs                                                              Regular           Deluxe

      Direct materials                                                        $65.00          $105.00

      Direct labour ($20 per hour)                                     10.00                20.00

      Manufacturing overhead*                                           4.80                  9.60

* Under the company's current costing, manufacturing overhead is allocated on the basis of direct labour-hours. The overhead for the year follows:

      Materials handling                                                $   300,000

      Setups                                                                        400,000

      General factory overhead                                         500,000

           Total                                                                 $1,200,000

The following table presents the activity levels that relate to the overhead costs:

      Cost Driver                       Regular           Deluxe            Total

      Number of parts                600,000          900,000       1,500,000

      Number of setups                       75                    50                 125

      Direct labour-hours              45,000            80,000          125,000

The market price for the regular chairs is $ 104 with expected sales of 40,000 units. The company expects to sell 25,000 deluxe chairs at a selling price of $170 per unit.

Required:

Determine the unit gross profit for the regular chair using both traditional and activity-based costing methods.

Answer 1

Part 1
	Computation of Unit Gross Profit under Traditional Costing
		Regular	Deluxe
	Sales Price per unit	$                  104.00	$                                 170.00
	Less:Direct materials per unit	$                    65.00	$                                 105.00
	Less:Direct labor per unit	$                    10.00	$                                   20.00
	Less:Manufacturing overhead per unit	$                      4.80	$                                     9.60
	Unit Gross Profit	$                    24.20	$                                   35.40
Part 2	Computation of ABC rate
	Activity	OH Costs(Col 1)	No. of activity base(Col 2)	Activity Rate(Col 1 / Col 2)
	Materials handling	$                300,000	1,500,000	$                                                 0.20	per part
	Setups	$                400,000	125	$                                          3,200.00	per setup
	General Factory Overhead	$                500,000	125,000	$                                                 4.00	Per direct labor hours
	Total Overhead Cost	$             1,200,000
			Regular	Deluxe
		ABC Rate	Activity Based usage	Activity Based usage*ABC rate	Activity Based usage	Activity Based usage*ABC rate
	Materials handling	$                      0.20	600000	$                                           120,000	900000	$                                 180,000
	Setups	$               3,200.00	75	$                                           240,000	50	$                                 160,000
	General Factory Overhead	$                      4.00	45000	$                                           180,000	80000	$                                 320,000
	Total Overhead Cost allocated			$                                           540,000		$                                 660,000
	No. of units sold			40000		25000
	Manufacturing overhead per unit			$                                               13.50		$                                     26.40
	Computation of Unit Gross Profit under Activity Based Costing
		Regular	Deluxe
	Sales Price per unit	$                  104.00	$                                 170.00
	Less:Direct materials per unit	$                    65.00	$                                 105.00
	Less:Direct labor per unit	$                    10.00	$                                   20.00
	Less:Manufacturing overhead per unit	$                    13.50	$                                   26.40
	Unit Gross Profit	$                    15.50	$                                   18.60