Maxey & Sons manufactures two types of storage cabinets—Type A and Type B—and ap
ID: 2580524 • 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 $80 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 $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?
Type A Type B Anticipated volume (units) 8,000 15,000 Direct-material cost per unit $ 35 $ 60 Direct-labor cost per unit 20 20Explanation / Answer
a) Calculation of Overhead cost per unit by company's current overhead costing procedures
Computation of Unit Manufacturing cost (Amount in $)
b) Calculation of Overhead cost per unit by Activity based Costing
Manufacturing setups cost (on the basis of number of setups in the ratio of 50:30)
420,000
(672,000*50/80)
252,000
(672,000*30/80)
768,000
(1,848,000*16,000/38,500)
1,080,000
(1,848,000*22,500/38,500)
320,000
(560,000*100/175)
240,000
(560,000*75/175)
Computation of Unit Manufacturing cost (Amount in $)
c) the cost of Type A storage cabinet is understated by the use of machine hours to allocate total manufacturing overheads to production. This is shown as follows :-
d) The total manufacturing cost of Type A is $243.50 and if company provide a discount on current selling price of $30 the net selling price will be $230 ($260-$30). This will result in net loss to the company of $13.50. Thus this discount of $30 is not advisable.
Particulars Type A Type B Manufacturing overhead rate per machine hour (A) $80 $80 Machine hours (B) 16,000 22,500 Total Manufacturing Overhead (C = A*B) $1,280,000 $1,800,000 Anticipated units (D) 8,000 15,000 Manufacturing Overhead per unit (C/D) $160 $120