Question

In: Accounting

Classic Cabinets has a factory that produces custom kitchen cabinets. It has multiple product lines. Materials...

Classic Cabinets 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.   
Salaries-office & administrative $520,000  
Salaries for factory personal $220,000  
Office Rent $125,000  
Factory Rent $20,000  
Utilities and Misc office expenses(based on units sold) $20,000  
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  
     
Direct labor hours 16,000  
Material cost (wood and other) $1,200  
Custom kitchen average labor hours 20 hours
Labor cost per hour $10  
Markup 65%  
Sold unit per year 800 units
     
Total cost /unit $1,400  
Selling price /unit $2,310  
     
Income Statement    
Sales $1,848,000  
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. You should calculate an Overhead rate. Discuss other options for the activity base and the importance of the MOH allocation.   Do multiple product lines impact the MOH allocation?

Solutions

Expert Solution

Computation of predetermined MOH rate:

Salaries for Factory Personnel $ 220,000
Factory Rent 20,000
Depreciation on Factory Equipment 70,000
Factory Property Taxes 10,000
Maintenance of Factory Equipment 80,000
Total Manufacturing Overhead $ 400,000
Direct Labor Hours ( DLH ) 16,000
Predetermined Overhead Rate $ 25 per DLH

Computation of cost per custom kitchen cabinet :

Direct Material $ 1,200
Direct Labor ( 20 hours x $ 10) 200
Manufacturing Overhead ( 20 hours x $ 25) 500
Total Cost $ 1,900

Multiple product lines would impact the MOH allocation, because each product line will have different consumption of resources and activities. Some product lines may be capital intensive ( use of machine hours predominantly) and others may be labor intensive ( use of DLH predominantly). One product line may require 1 hour of inspection and quality control, whereas another may require 2 hours. Therefore, following a single plantwide MOH allocation rate would distort cost information.


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