Reference no: EM132561708

Pakistan Office Equipment Corporation manufactures two types of filing cabinets-Portable and VIP-and applies manufacturing overhead to all units at the rate of Rs.80 per machine hour. Production information follows:

                                                       Portable                            VIP

Direct-material cost                     Rs.40                      Rs.65

Direct-labor cost                           Rs.25                       Rs.25

Budgeted volume (units)                 16,000                       30,000

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.

Cost Drivers                          Portable                   VIP                        Total

Setups                              100                     60                              160

Machine hours                      32,000                  45,000                       77,000

Outgoing shipments                     200                     150                           350

The firm's total overhead of Rs.6,160,000 is subdivided as follows: manufacturing setups, Rs.1,344,000; machine processing, Rs.3,696,000; and product shipping, Rs.1,120,000.

Required:

Question 1. Compute the unit manufacturing cost of Portable and VIP filing cabinets by using the company's current overhead costing procedures.

Question 2. Compute the unit manufacturing cost of Portable and VIP filing cabinets by using activity based costing.

Question 3. Is the cost of the Portable filing cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?