Maxey & Sons manufactures two types of storage cabinets—Type A and Type B—and ap
ID: 2524494 • Letter: M
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.
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.
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?
Type A Type B Anticipated volume (units) 24,800 46,500 Direct-material cost per unit $ 30 $ 45 Direct-labor cost per unit 35 35Explanation / Answer
1. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using the company’s current overhead costing procedures.
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.
3. Overstated or understated manufacturing overhead
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
As seen from the above table, in light of the loss on sale, the discount offer is not advisable
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