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 $124 per machine hour. Production information follows.

	Type A			Type B
Anticipated volume (units)		24,800			46,500
Direct-material cost per unit	$	30		$	45
Direct-labor cost per unit		35			35

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		144			104			248
Machine hours		49,600			69,750			119,350
Outgoing shipments		200			150			350

The firm’s total overhead of $14,799,400 is subdivided as follows: manufacturing setups, $3,228,960; machine processing, $8,879,640; and product shipping, $2,690,800.

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 $369.50 and the marketing manager is contemplating a $41 discount to stimulate volume. Is this discount advisable?

Answer 1

1. 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
Direct-material cost per Unit	30	45
Direct - labor cost per unit	35	35
Manufacturing overhead	248	186
Unit Manufacturing cost	313	266

Explanation : for computing the manufacturing overhead, = machine hours * 124 / Estimated volume (units)

Type - A = 49600 * 124 / 24800 = 248

Type - B = 69750 * 124 / 46500 = 186

Question - 2    Using activity-based costing.

	Type A	Type B
Direct-material cost per Unit	30	45
Direct - labor cost per unit	35	35
Manufacturing overhead
Setups	75.6	29.12
Machine processing	148.8	111.6
Product shipping	62	24.8
Total Manufacturing cost	351.4	245.52

3. Overstated or understated manufacturing overhead

	Type A	Type B
Overhead under Activity based method	286.4	165.52
(-) Overhead under Machine hour method	248	186
Under stated or ( over stated)	38.4	-20.48

Type - A ... Understated by 38.4 per Unit. Total manufacturing overhead understated = 38.4 * 24800 = 952,320

Type - B .. Overstated by 20.48 per unit. Total manufacturing overhead overstated = 20.48 * 46500 = 952320

Question - 4

Selling price ( gross)	369.5
(-) proposed discount	41
Net selling price	328.5
(-) Total manufacturing cost	351.4
Loss on sale per unit	-22.9

As seen from the above table, in light of the loss on sale, the discount offer is not advisable