Pristine Ltd manufactures two types of storage cabinets-Deluxe and Executive-and applies manufacturing overhead to all units at the rate of $120 per machine hour. Production information follows.
_______________________________ Deluxe ______________ Executive
Direct material cost ………………….. $52.50 …………………….. $90
Direct labour cost …………………….. 30.00 ……………………… 30
Budgeted volume (units) …………….. 8 000 …………………. 15 000
The management accountant 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:
The firm’s total overhead of $4 620 000 is subdivided as follows: manufacturing setups, $1 008 000: machine processing, $2 772 000; and product shipping, $840 000.
Required:
1. Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using the company’s current overhead costing procedures.
2. Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using activity-based costing.
3. Is the cost of the Deluxe cabinet overstated or understated (i.e. distorted) by the use of machine hours to allocate total manufacturing overhead to production? If so. by how much?
4. Calculate the aggregate amount by which the Deluxe cabinet line is under-costed by the company’s current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system over-costs the Executive cabinet line.
5. Assume that the current selling price of a Deluxe cabinet is $390 and the marketing manager is contemplating a $45 discount to stimulate sales. Is this discount advisable? Briefly discuss.
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