Reference no: EM132561958

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?