Question

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?

Answer 1

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.