Reference no: EM133067811

Question - Noble industries manufactures two models of tiffany style lamps: a table top model and a floor model. Summary data for the two products for the most recent fiscal year showed the following:

Unit cost Table top Model Floor model

Direct Materials $28 $34

Direct labour (@14/hour) 7 14

Manufacturing Overhead 8 16

Under the company's current costing manufacturing overhead is allocated on the basis of direct labour-hours. The company president is concerned that the use of a single overhead cost pool does not result in accurate costing of the two product lines and is wondering whether the company should implement activity based costing (ABC).

The overhead for the year has been estimated at a total cost of $1,600,000. Further analysis of the overhead costs resulted in the following classification:

Material handling $450,000

Setups 750,000

General factory overhead 400,000

The company has identified the appropriate cost driver for each activity. Material handling will be allocated using number of parts, setups will be allocated based on number of setups, and a general factory overhead will be allocated using direct labour-hours. The company has budgeted for the production of 40,000 units of the table top model and 80,000 units of the floor model. Consumption of the cost drivers, based on this production volume is estimated as follows:

Table Top Model Floor Model Total

Number of Parts 160,000 240,000 400,000

Direct Labour hours 20,000 80,000 100,000

Number of setups 500 250 750

The company currently prices its products by adding a 40% markup to the total manufacturing cost.

Required -

1. Compute the per unit cost and selling price of both the models of lamps based on the current costing system.

2. Compute the per-unit cost and selling price of both models of lamp using an ABC costing system.