Assignment: 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 3 activities: manufacturing setups, machine processing, and product shipping.
Data on the number of setups, machine hours, and outgoing shipments, which are the activities 3 respective cost drivers, follows.
| Type A Type B Total |
| Set ups..................... 50 30 80 |
| Machine hours............ 16,000 22,500 38,500 |
| Outgoing shipments....... 100 75 175 |
The firms’s total overhead of $3,080,000 is subdivided as follows:
| Manufacturing setups $672,000 |
| Machine processing $ 1,848,000 |
| Product shipping $560,000 |
Question 1. Compute the unit manufacturing cost of TypeA and Type B storage cabinets by using the company’s current overhead costing procedures.
Question 2. Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity based costing.
Question 3. Is the cost of the Type A storage overstate or unstated by the use of machine hours to allocate total manufacturing overhead to production? By how much?
Question 4. Assume that the selling price of Type A storage cabinet is $260 and the marketing manager is contemplating a $30 discount to stimulate volume. Is this discount advisable – explain.