Question - A company manufactures household items sold at trade shows. The items, classified as either Trinkets and Widgets are manufactured on a common assembly line. Although different direct materials are used, and the machinery is re-set for each product, the direct labourers are the same for each product line.
The plant-wide rate for allocating manufacturing overhead to its products is no longer acceptable. The production manager has heard about activity-based costing and has assembled some information for use in changing the cost system to a cost driver concept.
With the help of the accounting department, the manager has been able to establish the following relationships between production costs and some of the indirect manufacturing activities for January, along with the production data for the two product lines:
Activity Cost driver Allocation rate Trinkets Widgets
Material handling Number of parts $ 1.00 per part 2,000 1,300
Machining Machine hours $15.00 per hour 205 300
Assembly Units began $ 1.60 per unit 1,000 1,300
Inspection Number tested $ 2.00 per unit 100 1,200
Direct costs:
Trinkets Widgets
Labour $12,000 $12,000
Materials $ 5,200 $ 2,600
Required: Determine the total production cost of each of two product lines for January and the cost per unit, assuming all units started were completed.