Question

VIP luggage is one of the main product lines for Smith Corporation. Smith uses large molding machines to press a specially formulated chemical compound into metal molds corresponding to different suitcase sizes and shapes. The molded product is then trimmed, lined with fabric, and fitted with accessories such as locks and hinges before being packed and shipped. The following data pertain to the cost of setting up one of the molding machines and the setup cost for the machine is $140,000 per year.
Product (Suitcase type)	# of setups per year	Hours per setup	# of units produced
24" Two-suiter	15	5	400
26" Three-suiter	10	10	300
30" Jumbo Wheeler	5	15	100
Required: a) Suppose Smith Corporation allocates setup costs to products using the number of setups as the allocation basis. How much setup cost will be allocated to each unit of the three products Smith manufactures? ( b) Suppose Smith Corporation allocates setup costs using the total number of setup hours as the allocation basis. How much setup cost will be allocated to each unit of the three products? ( c) Suppose Smith allocates setup costs using the number of units produced. Calculate the setup cost allocated to each unit of the three products. d) Give a condition that would result in the cost allocation per unit in (a) and in (b) would be the same. No calculation required. e) Give a condition that would result in the cost allocation per unit in (a) and in (c) would be the same. No calculation required.

Answer 1

a) Allocation basis: Number of setups

Product	Allocation Basis	Allocated Setup Cost	No of Units	Setup Cost per Unit
24" Two-suiter	15	70000	400	175.00
26" Three-suiter	10	46667	300	155.56
30" Jumbo Wheeler	5	23333	100	233.33
Total	30	140000

b) Allocation basis: Total number of setup hours

Product	Allocation Basis*	Allocated Setup Cost	No of Units	Setup Cost per Unit
24" Two-suiter	75	42000	400	105.00
26" Three-suiter	100	56000	300	186.67
30" Jumbo Wheeler	75	42000	100	420.00
Total	250	140000

*Allocation basis (total number of setup hours) = Number of setups per year x Hours per setup

c) Allocation basis: Total number of setup hours

Product	Allocation Basis	Allocated Setup Cost	No of Units	Setup Cost per Unit
24" Two-suiter	400	70000	400	175.00
26" Three-suiter	300	52500	300	175.00
30" Jumbo Wheeler	100	17500	100	175.00
Total	800	140000

d)  Allocation cost per unit in (a) and (b) would be the same if the number of setups and total number of setup hours are the same.

e) Allocation cost per unit in (a) and (c) would be the same if the number of setups and the number of units produced are the same.