Reference no: EM133535481
Case Study: Maxey & Sons manufactures two types of storage cabinets- A and B-and applies manufacturing overhead to all units at the rate of $84 per machine hour. Production information follows.
| Descriptions | A | B |
| Anticipated volume (units) |
16,800 |
31,500 |
| Direct-material cost per unit |
$ 10 |
$ 15 |
| Direct-labor cost per unit |
15 |
15 |
The controller, who is studying the use of activity-based costing, 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.
| Descriptions | A | B | Total |
| Setups |
104 |
64 |
168 |
| Machine hours |
33,600 |
47,250 |
80,850 |
| Outgoing shipments |
200 |
150 |
350 |
The firm's total overhead of $6,791,400 is subdivided as follows: manufacturing setups, $1,481,760; machine processing, $4,074,840; and product shipping, $1,234,800.
Required:
1 Compute the unit manufacturing cost of A and B storage cabinets by using the company's current overhead costing procedures.
2 Compute the unit manufacturing cost of A and B storage cabinets by using activity-based costing.
3 Is the cost of the A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?
4 Assume that the current selling price of A storage cabinet is $242.50 and the marketing manager is contemplating a $31 discount to stimulate volume. Is this discount advisable?