Company manufactures two different products a and b in the

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Reference no: EM13579915

Company manufactures two different products, A and B. In the past, the company has allocated its manufacturing support costs based on plantwide support cost rate based on direct labour hours. The new consultant suggests that the company consider assigning support costs to the products using activity-based costing. After studying the manufacturing activities and costs, the consultant collected the following data for last year:

Item	Product A	Product B
Units produced and sold	25,000	50,000
Direct labour hours used	25,000	75,000
Direct labour cost	$50,000	$1,125,000
Number of times handled	10,000	5,000
Number of cuts	3,000	2,000
Number of design changes	500	250
Number of product setups	2,000	1,500

The actual manufacturing support costs incurred last year were as follows:

Cost Pool

Activity Costs

Handling

$750,000

Cutting

600,000

Design changes

825,000

Setups

700,000

Total

$2,875,000

The direct material cost for product A is $30 per unit, and $35 per unit for product B.

Explain:

a. Determine the unit cost of each product using direct labour hours to allocate all manufacturing support costs.

b. Determine the unit cost of each product using activity-based costing.

c. Explain why the unit costs differ between requirements a and b.

d. Assume that Company produces 30 different products in a complex manufacturing environment

involving many more than four activities. Suggest an alternative costing model.

Reference no: EM13579915

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