Question

Wilmington Office Equipment Corporation manufactures two types of filing cabinets—Deluxe and Executive—and applies manufacturing overhead to all units at the rate of $84.00 per machine hour. Production information follows.

	Deluxe			Executive
Direct-material cost	$	10		$	15
Direct-labor cost		15			15
Budgeted volume (units)		16,800			31,500

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.

	Deluxe			Executive			Total
Setups		104			64			168
Machine hours		33,600			47,250			80,850
Outgoing shipments		200			150			350

The firm’s total overhead of $6,791,400 is subdivided as follows: manufacturing setups, $1,481,760; machine processing, $4,074,840; and product shipping, $1,234,800.

Required:

1.	Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using the company’s current overhead costing procedures.

      

2.	Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using activity-based costing. (Round activity based application rates, overhead application and the final answers to 2 decimal places.)

       

3.	Is the cost of the Deluxe filing cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much? (Round your answer to 2 decimal places.)

      

4.	Calculate the aggregate amount by which the Deluxe cabinet line is undercosted by the company’s current traditional overhead costing procedures. Calculate the aggregate amount by which the traditional system overcosts the Executive cabinet line. (Round your answers to the nearest whole dollar.)

       

5.	Assume that the current selling price of a Deluxe filing cabinet is $242 and the marketing manager is contemplating a $31 discount to stimulate volume. Is this discount advisable?
	Yes No

Answer 1

Q1) Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using the company’s current overhead costing procedures.

	Deluxe	Executive
Direct material	10	15
Labor cost	15	15
Overhead	168	126
Unit manufacturing cost	193	156

For computing overhead, we should first calculate machine hour needed per unit. For example

Deluxe = 33600 Machine hours for 16800 units of production. So per unit = 33600/16800 = 2 hours.

This will be multiplied by 84 per machine hour as given in the question = 2 * 84 = 168. Similarly we calculate for Executive i.e 47250 hours / 31500 units = 1.5 hour per unit. This is mutiplied with 85 to get overhead charge of 126.

Q2) Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using activity-based costing.

	Deluxe	Executive
Direct material	10	15
Labor cost	15	15
Overhead
Setup cost	54.6	17.92
Machine processing cost	100.8	75.6
Shipping cost	42	16.8
Unit Manufacturing cost	222.4	140.32

Explanation:

Setup cost = 1481,760 shall be divided between two products in the ratio of 104 : 64.

Deluxe = 1481,760 * 104 / 168 = 917280 ......... this is total setup cost for deluxe comparising 16800 units

So Per unit = 917280 / 16800 = 54.6

Executive = 1481,760 * 64 / 168 = 564480 ........... this is for 31500 units of executive

So per unit = 564480 / 31500 = 17.92

Similarly Machine processing cost is first shared to two proucts in the ratio of machine hours and then divided with number of units produced to get per unit.

Q3)

Unit manufacturing cost is understated under machine hour rate method of overhead allocation.

Amount understated = (222.4 - 193) = 29.2 per unit

4)

Aggregate amount by which the Deluxe cabinet line is undercosted = 29.2 * 16800 = 490,560

Aggregate amount by which the traditional system overcosts the Executive cabinet line.

= ( 156 - 140.32) * 31500 =  493,920

5)

No. The effective selling price = 242 - 31 = 211 which is going to be lower than its units cost of manufacturing.