Question

3.

Fifer Company produces two types of entry doors: the Hollow Core and the Solid Door models. The Company has used direct labor dollars to allocate the overhead cost $47,450,000.

The company’s CFO, Brian Smythe , has offered the following information regarding the two products:

Hollow Core       Solid Door

Sales in units      400,000        50,000

Sales price per unit          $475.00                 $650.00

Direct materials per unit               55.00     130.00

Direct labor cost per unit              75.00     50.00

The company has hired you as an outside consultant to review the cost system and make recommendations. You decide that an Activity Based Cost system should be considered and compile the following information based on conversations with the production manager:

Activity                 Cost Driver          Cost

Order Taking      Number of orders            $ 500,000

Setups                  Number of setups            5,000,000

Machine cost     Number of machine hours            41,950,000

The number of transactions for each cost driver is as follows:

Cost Driver          Total      Hollow Solid

Number of orders 500    100         400

Number of setups            2,500     2,000     500

Number of machine hours            600,000                 300,000                 300,000

Compute the product cost per door (per unit) using activity based costing for each product. Hollow Core Solid Door Product Cost per door ________________ ___________________ 4. How should Mr. Smythe explain the reasons for any differences observed in your analysis above?

Answer 1