Computing product costs in an ABC system
McKnight, Inc., manufactures bookcases and uses an activity-based costing system. McKnight's activity areas and related data follow:
Activity Budgeted Cost of Activity Allocation Base Predeterimined Overhead Allocation Rate
Materials Handling $240,000 Number of parts $1.00
Assembly $3,300,000 Direct labor hours $17.00
Finishing $150,000 Number of finished units $2.50
McKnight produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct material cost, and other data follow:
Product Total Units Produced Total Direct Materials Cost Total Number of Parts Total Assembling Direct Labor Hours
Standard Bookcase 2,000 units $24,000(material) $30,000(labor) 8,000 parts 3,000 hours
Unfinished Bookcase 2,600 units $26,000(material) $26,000(labor) 7,800 parts 2,600 hours
Requirement
1. Compute the manufacturing product cost per unit of each type of bookcase.
2. Suppose that pre manufacturing activities, such as product design, were assigned to the standard bookcase at $4 each and to the unfinished bookcase at $3 each. Similar analyses were conducted of post manufacturing activities such as distribution, marketing, and customer service. The post manufacturing costs were $20 per standard bookcase and $15 per unfinished bookcase. Compute the full product costs per unit.
3. Which product costs are reported in the external financial statements? Which costs are used for management decision making? Explain the difference.
4. What price should McKnight's managers set for unfinished bookcaes to earn a net profit of $16 per bookcase?