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P8
P8.35 Traditional and activity-based product costing: manufacturer Pristine Ltd manufactures two types of storage cabinets, deluxe and executive, and applies manufacturing overhead to all units at the rate of $120 per machine hour. Production information follows. LOB.5 8.6 Direct material card Direct bour cost Hudected volume units Deluxe 552.50 30.00 8000 Executive 590.00 30.00 15000 The management accountant 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 30 80 Setups Machine hours Outgoing shipments 16100 100 22.500 75 39500 175 The firm's total overhead of $4620000 is subdivided as follows: manufacturing setups $1008000, machine processing, $2772000; and product shipping. $840000 Required: 1. Calculate the unit manufacturing cost of deluxe and executive cabinets by using the company's current overhead costing procedures. 2. Calculate the unit manufacturing cost of deluxe and executive cabinets by using activity-based costing 3. Calculate the aggregate amount by which the deluce cabinet line is undercosted overcasted by the company's current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system undercosts/overcosts the executive cabinet line. 4. Assume that the current selling price of a deluxe cabinet is $390 and the marketing manager is contemplating a $45 discount to stimulate sales. Is this discount advisable? Briefly discuss.
Expert Solution
| 1.Unit manufacturing cost under the current traditional costing of Ohs | |||
| Deluxe | Executive | Total | |
| Direct materials | 52.5 | 90 | |
| Direct labor | 30 | 30 | |
| Mfg. OH | |||
| $ 120 per m/c hr.*16000 m/c hrs./8000 units | 240 | ||
| $ 120 per m/c hr.*22500 m/c hrs./15000 units | 180 | ||
| Total Mfg.cost/unit | 322.5 | 300 | |
| Budgeted units | 8000 | 15000 | |
| Total MOHs | |||
| No.of Units*MOH/unit) | 1920000 | 2700000 | 4620000 |
| 2.Unit manufacturing cost under the ABC of Ohs | |||||
| Allocation of Ohs based on activities level | |||||
| Deluxe | Executive | ||||
| Mfg. set-up costs | 50/80*1008000= | 630000 | 30/80*1008000= | 378000 | 1008000 |
| M/c processing | 16000/38500*2772000= | 1152000 | 22500/38500*2772000= | 1620000 | 2772000 |
| Product shipping | 100/175*840000= | 480000 | 75/175*840000= | 360000 | 840000 |
| Total MOH | 2262000 | 2358000 | 4620000 | ||
| No.of units | 8000 | 15000 | |||
| MOH/unit | 282.75 | 157.2 | |||
| (Total MOH /No.of units) | |||||
| Direct materials | 52.5 | 90 | |||
| Direct labor | 30 | 30 | |||
| Total Mfg. costs/unit | 365.25 | 277.2 |
| 3. Total mfg. costs: | ||
| Deluxe | Executive | |
| as per traditional csoting | 322.5 | 300 |
| as per ABC | 365.25 | 277.2 |
| Deluxe is Undercosted by(365.25-322.5) | 42.75 | |
| Executive is Overcosted by(300-277.20) | 22.8 |
| 4.Net selling price of the Deluxe after discount will be |
| 390-45= 345 |
| where its full mfg. cost under activity based costing is |
| 365.25 |
| Hence, offering discounts is not advisable. |
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