Problem - Wilmington Office Equipment Corporation manufactures two types of filing cabinets-Deluxe and Executive-and applies manufacturing overhead to all units at the rate of $120.00 per machine hour. Production information follows.
|
Deluxe
|
Executive
|
|
Direct-material cost
|
$28
|
$42
|
|
Direct-labor cost
|
33
|
33
|
|
Budgeted volume (units)
|
24,000
|
45,000
|
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.
|
|
Deluxe
|
Executive
|
Total
|
|
Setups
|
140
|
100
|
240
|
|
Machine hours
|
48,000
|
67,500
|
115,500
|
|
Outgoing shipments
|
200
|
150
|
350
|
The firm's total overhead of $13,860,000 is subdivided as follows: manufacturing setups, $3,024,000; machine processing, $8,316,000; and product shipping, $2,520,000.
Required:
1. Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using the company's current overhead costing procedures.
2. Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using activity-based costing.
3. Is the cost of the Deluxe filing cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?
4. Calculate the aggregate amount by which the Deluxe cabinet line is undercosted by the company's current traditional overhead costing procedures. Calculate the aggregate amount by which the traditional system overcosts the Executive cabinet line.
5. Assume that the current selling price of a Deluxe filing cabinet is $360 and the marketing manager is contemplating a $40 discount to stimulate volume. Is this discount advisable?