Problem:
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.
Type A Type B
Anticipated volume (units) 8,000 15,000
Direct-material cost $35 $60
Direct-labor cost 20 20
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.
Type A Type B Total
Setups 50 30 80
Machine hours 16,000 22,500 38,500
Outgoing shipments 100 75 175
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.
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 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 simulate volume. Is the discount advisable? Briefly discuss.