Question

1. Open Doors, Inc., produces two types of doors, interior and exterior. The company’s simple costing system has two direct cost categories (materials and labor) and one indirect cost pool. The simple costing system allocates indirect costs on the basis of machine-hours. Recently, the owners of Open Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Open Doors production for the most recent year follows:

Interior                                    Exterior           

Units sold                                                        3,200                                       1,800

Selling price                                                    $ 125                                       $ 200   

Direct material cost per unit                           $ 30                                         $ 45

Direct manufacturing labor cost per hour      $ 16                                         $ 16

Direct manufacturing labor-hours per unit     1.50                                         2.25

Production runs                                               40                                            85

Material moves                                               72                                            168

Machine setups                                               45                                            155

Machine-hours                                                5,500                                       4,500

The owners have heard of other companies in the industry that are now using an activity-based costing system and are curious how an ABC system would affect their product costing decisions. After analyzing the indirect cost pool for Open Doors, four activities were identified as generating indirect costs: production scheduling, material handling, machine setup and  assembly. Open Doors collected the following data related to the indirect cost activities:

Activity                                   Activity           Cost                 Activity Cost Driver

Production scheduling                        $95,000                       Production runs

Material handling                               $45,000                       Material moves

Machine setup                                     $25,000                       Machine setups

Assembly                                            $60,000                       Machine-hours

1. Calculate the cost of an interior door and an exterior door under the existing simple costing system(Plant-Wide OH Rate)

2. Calculate the cost of an interior door and an exterior door under an activity-based costing system

Answer 1