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 $148 per machine hour. Production information follows.

	Type A			Type B
Anticipated volume (units)		29,600			55,500
Direct-material cost per unit	$	42		$	63
Direct-labor cost per unit		47			47

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		168			128			296
Machine hours		59,200			83,250			142,450
Outgoing shipments		200			150			350

The firm’s total overhead of $21,082,600 is subdivided as follows: manufacturing setups, $4,599,840; machine processing, $12,649,560; and product shipping, $3,833,200.

Required:

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

Answer 1

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

	Type A	Type B
Estimated volume	29,600	55,500
Direct material	42	63
Direct labour	47	47
Prime cost	89	110
Total machine hours	59,200	83,250
Machine hours per unit	2	2
Overheads allocated @ $148 per machine hour	296	222
Unit manufacturing cost	385	332

Overhead allocation rates under ABC
Type of overhead	Cost driver	Overhead amt	Cost driver	Overhead rate / unit of cost driver
Manufacturing set ups	set ups	45,99,840	296	15,540.0
machine processing	machine hours	1,26,49,560	1,42,450	88.8
product shipping	outgoing shipments	38,33,200	350	10,952.0
PARTICULARS	Type A	Type B
Estimated volume	29,600	55,500
Direct material	42	63
Direct labour	47	47
Prime cost	89	110
Overhead allocated
-manufacturing set ups	88.2	35.84
-machine processing	177.6	133.2
-product shipping	74	29.6
Total overheads allocated under ABC	339.8	198.64
Unit manufacturing cost	429	309

Unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing

The cost of the Type A storage cabinet is understated by the use of machine hours to allocate total manufacturing overhead to production. It is understated by 44$ per unit.