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 $80 per machine hour. Production information follows.

	Type A			Type B
Anticipated volume (units)		8,000			15,000
Direct-material cost per unit	$	35		$	60
Direct-labor cost per unit		20			20

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		50			30			80
Machine hours		16,000			22,500			38,500
Outgoing shipments		100			75			175

The firm’s total overhead of $3,080,000 is subdivided as follows: manufacturing setups, $672,000; machine processing, $1,848,000; and product shipping, $560,000.

Required:

1. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company’s current overhead costing procedures.

2. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing.

3. 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?

4. Assume that the current selling price of a Type A storage cabinet is $260 and the marketing manager is contemplating a $30 discount to stimulate volume. Is this discount advisable?

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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. (Do not round intermediate calculations. Round your 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 your answer to 2 decimal places.)

	Type A store cabinet line is

Assume that the current selling price of a Type A storage cabinet is $260 and the marketing manager is contemplating a $30 discount to stimulate volume. Is this discount advisable?

Yesradio button unchecked1 of 2

Noradio button unchecked2 of 2

Answer 1

	1
			Type A	Type B			Total Overhead Cost	3080000
		Direct Material	35.00	60.00			Total Machine Hour	38500
		Direct Labor	20.00	20.00			OH Cost Per MH	80.00
		Overhead Cost	160.00	120.00
		Total	215.00	200.00
							Overhead Cost:	Type A	Type B
							Machine Hours	16000	22500
							Allocated OH(MH*80)	1280000	1800000
							Total Units	8000	15000
							Overhead Cost PU	160.00	120.00
	2	Activity Based Costing:	A		B	A/B
		Activity Pools	OH Cost	Activity Pool	Activity Pool	Activity Rate
		Manufacturing Setup	672000	Setups	80	8400
		Machine Processing	1848000	MH	38500	48
		Product Shipping	560000	Outgoing Shipments	175	3200
			3080000
		Allocation to Products:
		Activity Pools	Type A	Type B
		Manufacturing Setup	420000	252000
		Machine Processing	768000	1080000
		Product Shipping	320000	240000
		Total Allocation	1508000	1572000
		Total Units	8000	15000
		Overhead Cost PU	188.50	104.80
			Type A	Type B
		Direct Material	35.00	60.00
		Direct Labor	20.00	20.00
		Overhead Cost	188.50	104.80
		Total	243.50	184.80
	3		Type A
		MH Based Method	215.00
		ABC Method	243.50
		Status	Understated
		Difference	28.50
		Units	8000
		Variance Amt	228000
	4		Current	Proposed
		Sales Price	260.00	230.00
		Less: ABC Unit Cost	243.50	243.50
		Net Income (Loss)	16.50	-13.50
		Since Profit going negative, it is not advisable