Pristine Ltd manufactures two types of storage cabinets, deluxe and executive, a

Question

Pristine Ltd manufactures two types of storage cabinets, deluxe and executive, and applies manufacturing overhead to all units at the rate of $180 per machine hour. Production information follows. Deluxc 50.00 30.00 8,000 Exccutive Direct material cost Direct labour cost Budgeted volume (units) 70 30 15,000 The management accountant 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: Deluxe Executive Total 50 16,000 100 80 20,000 36,000 170 30 Setups Machine hours Outgoing shipments 70 The firm's total overhead of $6,845,800 is subdivided as follows: manufacturing setups, $1,289,600; machine processing, $4,968,000; and product shipping, $588,200. Required 1. Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using the company's current overhead costing procedures Deluxe Executive Unit manufacturing costs 2. Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using activity-based costing. (Round your intermediate calculations and final answers to 2 decimal places.) Deluxe Executive Unit manufacturing costs 3. Is the cost of the Deluxe cabinet overstated or understated (i.e. distorted) by the use of machine hours to allocate total manufacturing overhead to production? If so, by how much? (Round your intermediate calculations and final answers to 2 decimal places. Input the amount as positive value. Deluxe storage cabinet is

Explanation / Answer

Solution:

Part 1 – Unit Manufacturing Cost using current overhead costing procedure

Deluxe

Executive

Direct material cost per unit

$50

$70

Direct labor cost per unit

$30

$30

Applied Manufacturing Overhead (Refer Note 1)

$360

$240

Unit Manufacturing Costs

$440

$340

Note 1 --- As per Overhead Costing procedures, the manufacturing overhead is applied to all unit at the rate $180 per machine hour. Here total machine hours are given and overhead rate is given. Now we need to calculate applied manufacturing overhead per unit

Deluxe

Executive

Machine Hours (A)

16000

20000

Overhead Rate per MH (B)

$180

$180

Total Applied Manufacturing Overhead (A*B)

$2,880,000

$3,600,000

/ Budgeted Volume (Units)

8000

15000

Applied Manufacturing Overhead Per Unit

$360

($2,880,000 / 8000)

$240

($3,600,000 / 15000)

Part 2 – Unit Manufacturing Cost using activity based costing

- ABC is a costing method which identifies the activities in the organization and assigns the cost of each activity with resources to all the products or services according to the actual consumption of activity by the product or service.

- This system determines all the activities related to product or production process.

- This system calculates the cost of those activities which are related to product or production process and thereafter determine the cost of the product.

- In ABC costing the overhead costs are distributed to the product on the basis of benefit received from indirect activity.

- It helps to distribution of overheads on the basis of activities.

The Activity based overhead rate = Estimated Overheads related to the activity / Total Cost Driver per activity or Expected Total Activity)

First of all we will calculate Activity Rate per activity and then applied overhead based on the actual usage of activity by each product as follows

Deluxe

Executive

Activity Cost Pool

Expected Manufacturing Overhead Costs (A)

Expected Total Activity Cost Driver (B)

Activity Rate (C = A/B)

Activity Driver USAGE (H)

Overhead Assigned (C*H)

Activity Driver USAGE (E)

Overhead Assigned (C*E)

Setups

$1,289,600

80

Setups

$16,120

per setup

50

$806,000

30

$483,600

Machine Hour

$4,968,000

36000

Machine Hours

$138

per machine hour

16000

$2,208,000

20000

$2,760,000

Outgoing Shipments

$588,200

170

shipments

$3,460

per shipment

100

$346,000

70

$242,200

Total Applied Manufacturing Overhead (A)

$6,845,800

$3,360,000

$3,485,800

/ Budgeted Production Volume (units) (B)

8000

15000

Applied Manufacturing Overhead Per Unit (A/B)

$420.00

$232.39

Unit Manufacturing Cost

Deluxe

Executive

Direct material cost per unit

$50

$70

Direct labor cost per unit

$30

$30

Applied Manufacturing Overhead

(Refer working above)

$420

$232.39

Unit Manufacturing Costs

$500

$332.39

Part 3 –

According to Overhead costing procedure total manufacturing overhead applied (refer calculation of part 1) = $2,880,000

According to Activity Based Costing, total manufacturing overhead applied (refer calculation of part 2) = $3,360,000

Total Manufacturing Overheads are understated by $480,000 (3360,000 – 2880,000)

Part 4 --- This part is not clear to me. Can you explain what is the exact requirement.

Part 5 ---

Unit Manufacturing Cost of Deluxe Cabinet (as per ABC) = $500

Selling price per unit after discount (530 – 40) = $490

Since the selling price after discount is less than the unit manufacturing cost, it is not advisable to sell Deluxe Cabinet at this price.

NO

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Deluxe

Executive

Direct material cost per unit

$50

$70

Direct labor cost per unit

$30

$30

Applied Manufacturing Overhead (Refer Note 1)

$360

$240

Unit Manufacturing Costs

$440

$340

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