Reference no: EM131807763

Question:

Fancy Doors, Inc., produces two types of doors, interior and exterior. The company's simple costing system has two direct cost categories (materials and labor) and one indirect cost pool. The simple costing system allocates indirect costs on the basis of machine-hours. Recently, the owners of Fancy Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Fancy Doors production for the most recent year follows:

Interior	Exterior
Units sold	3,300	1,900
Selling price	$125	$215
Direct material cost per unit	$50	$65
Direct manufacturing labor cost per hour	$16	$16
Direct manufacturing labor-hours per unit	1.6	2.2
Production runs	40	90
Material moves	74	164
Machine setups	35	140
Machine-hours	6,000	4,000
Number of inspections	220	140

The owners have heard of other companies in the industry that are now using an activity-based costing system and are curious how an ABC system would affect their product costing decisions. After analyzing the indirect cost pool for Fancy Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine setup, assembly, inspection, and marketing. Fancy Doors collected the following data related to the indirect cost activities:

Activity	Activity Cost	Activity Cost Driver
Production scheduling	$91,000	Production runs
Material handling	$44,030	Material moves
Machine setup	$21,700	Machine setups
Assembly	$90,000	Machine-hours
Inspection	$23,400	Number of inspections

Marketing costs were determined to be 3% of the sales revenue for each type of door.

1. Calculate the cost of an interior door and an exterior door under the existing simple costing system.

2. Calculate the cost of an interior door and an exterior door under an activity-based costing system.

3. Compare the costs of the doors in requirements 1 and 2. Why do the simple and activity-based costing systems differ in the cost of an interior and exterior door?

4. How might Fancy Door, Inc., use the new cost information from its activity-based costing system to address the declining market share for interior doors?