Question - Activity Based Costing
Come-On-In company produces two types of entry doors: Standard and Deluxe. The assignment basis for manufacturing overheads has been direct labour hours. For 2016, the company complied the following data for the two products:
|
Standard
|
Deluxe
|
|
Sales units
|
400,000 Doors
|
50,000 Doors
|
|
Sales price per unit
|
$475
|
$690
|
|
Direct material cost per unit
|
$90
|
$120
|
|
Direct labour cost per unit
|
$40
|
$60
|
|
Manufacturing overhead cost per unit
|
$120
|
$80
|
During 2016, the company purchased a state-of-art robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign. The information gathered is as follows:
|
Activity
|
Cost Driver
|
Standard
|
Deluxe
|
Total
|
Cost
|
|
Setups
|
Number of setups
|
100
|
400
|
500
|
$2,900,000
|
|
Machine-related
|
Number of machine hours
|
300,000
|
300,000
|
600,000
|
$44,100,000
|
|
Packing
|
Number of shipments
|
200,000
|
50,000
|
250,000
|
$5,000,000
|
Required:
a. Using the current cost system, determine the total cost of manufacturing one unit of each product and the profit per unit for each product.
b. Under the current cost system, estimated manufacturing overhead per unit are less for the deluxe door ($80) than the standard door ($120). What is a likely explanation for this?
c. Using the activity-based costing data, compute the cost driver rate for each overhead activity.
d. Compute the revised manufacturing overhead cost per unit for each type of product.
e. Is the deluxe door as profitable as the original data estimated using previous cost system? Why or why not? Explain.