Company manufactures two different products, A and B. In the past, the company has allocated its manufacturing support costs based on plantwide support cost rate based on direct labour hours. The new consultant suggests that the company consider assigning support costs to the products using activity-based costing. After studying the manufacturing activities and costs, the consultant collected the following data for last year:
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Item
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Product A
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Product B
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Units produced and sold
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25,000
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50,000
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Direct labour hours used
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25,000
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75,000
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Direct labour cost
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$50,000
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$1,125,000
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Number of times handled
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10,000
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5,000
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Number of cuts
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3,000
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2,000
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Number of design changes
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500
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250
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Number of product setups
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2,000
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1,500
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The actual manufacturing support costs incurred last year were as follows:
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Cost Pool
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Activity Costs
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Handling
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$750,000
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Cutting
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600,000
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Design changes
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825,000
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Setups
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700,000
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Total
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$2,875,000
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The direct material cost for product A is $30 per unit, and $35 per unit for product B.
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Explain:
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a. Determine the unit cost of each product using direct labour hours to allocate all manufacturing support costs.
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b. Determine the unit cost of each product using activity-based costing.
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c. Explain why the unit costs differ between requirements a and b.
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d. Assume that Company produces 30 different products in a complex manufacturing environment
involving many more than four activities. Suggest an alternative costing model.
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