Comfy Chair Company makes two types of chairs, a lounge chair and a folding beach chair. The company uses a job-order costing system and applies overhead on the basis of direct labor hours. Comfy Chair expects to produce 40,000 lounge chairs and 100,000 beach chairs next year.
Comfy Chair has been considering changing to an activity based costing system. The company has reported the following results from the first-stage cost allocations for a year's production:
Overhead Cost Activities by Product
Activity Assigned Lounge Chairs Beach Chairs
Labor related $300,000 100,000 DLHrs 200,000 DLHrs
Machine related $450,000 30,000 MHrs 60,000 MHrs
Machine setups $730,000 4,000 Setups 1,000 Setups
Order processing $600,000 4,500 Orders 1,500 Orders
General factory $500,000
Direct Labor $2,000,000 DL$ $3,000,000 DL$
Direct Materials $3,200,000 DM$ $1,000,000 DM$
a) Determine the total cost per unit for each product using traditional job-order costing. Show your work.
b) Determine the total cost per unit for each product using activity based costing. Show your work.
c) Comment on the differences between the two.