Given: Maxey & Sons manufactures two types of storage cabinets—Type A and Type B
ID: 2360805 • Letter: G
Question
Given:Maxey & Sons manufactures two types of storage cabinets—Type A and Type B—and applies manufacturing overhead to all units at the rate of $80 per machine hour. Production information follows.
Type A Type B
Anticipated volume (units) 8,000 15,000
Direct-material cost per unit $ 35 $ 60
Direct-labor cost per unit 20 20
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.
Type A Type B Total
Setups 50 30 80
Machine hours 16,000 22,500 38,500
Outgoing shipments 100 75 175
The firm’s total overhead of $3,080,000 is subdivided as follows: manufacturing setups, $672,000; machine processing, $1,848,000; and product shipping, $560,000.
How do i find:
a). Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing
and
b). Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?
Explanation / Answer
a). Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing
For Setups, first find the rate by taking total cost of setups divided by total setups: 672,000/80 = $8400 per setup.
Find the rates for the processing and shipping by doing the same calculation, total costs for the activity divided by the total cost driver.
For machine processing: 1,848,000/38,500 = $48 per machine hour
For product shipping: 560,000/175 = $3200 per outgoing shipment
For A, 50 setups*8400 per setup = 420,000
16,000 machine hours * 48 per machine hour = 768,000
100 outgoing shiptments*3200 per shipment = 320,000
Total overhead for A = 1,508,000
Number of units 8000
Overhead per unit = 1,508,000/8000 = $188.50 per unit
DM per unit is 35, DL per unit is 20, so unit manufacturing cost for A is $273.50.
For B, 30 setups*8400 per setup = 252,000
22,500 machine hour * 48 per machine hour = 1,080,000
75 outgoing shipments * 3200 per shipment = 240,000
Total overhead for B = 1,572,000
Overhead per unit = 1,572,000/15,000 units = $104.80 per unit
DM = 60, DL = 20, so unit manufacturing cost for B is 104.80 + 60 + 20 = $184.80
b). Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?
Overhead using activity based costing for type A is 1,508,000.
Overhead based on machine hours would be: $80 per machine hour* 16,000 machine hours = 1,280,000.
Understated by 1,508,000 – 1,280,000 = 228,000
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