Wilmington Office Equipment Corporation manufactures two types of filing cabinet

Question

Wilmington Office Equipment Corporation manufactures two types of filing cabinets—Deluxe and Executive—and applies manufacturing overhead to all units at the rate of $104.00 per machine hour. Production information follows.

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.

     The firm’s total overhead of $10,410,400 is subdivided as follows: manufacturing setups, $2,271,360; machine processing, $6,246,240; and product shipping, $1,892,800.

Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using the company’s current overhead costing procedures.

Compute the unit manufacturing cost of Deluxe and Executive filing cabinets by using activity-based costing. (Round activity based application rates, overhead application and the final answers to 2 decimal places.)

Is the cost of the Deluxe filing cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much? (Round your answer to 2 decimal places.)

Calculate the aggregate amount by which the Deluxe cabinet line is undercosted by the company’s current traditional overhead costing procedures. Calculate the aggregate amount by which the traditional system overcosts the Executive cabinet line. (Round your answers to the nearest whole dollar.)

Wilmington Office Equipment Corporation manufactures two types of filing cabinets—Deluxe and Executive—and applies manufacturing overhead to all units at the rate of $104.00 per machine hour. Production information follows.

Explanation / Answer

(1.) Unit manufacturing cost of Deluxe and Executive filing cabinets by using the company’s current overhead costing procedures:

Deluxe Executive

total overehad cost $104 * 41,600 machine hour $104 * 58,500 machine hour

= $4326400 =$6084000

unit manufacturing cost   $4326400 / 20,800 units   $6084000 / 39,000 units

=$208 per unit =$156 per unit

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