Prime Furniture designs and builds factory-made, premium, wood armoires for homes. All are made of white oak.
Question:
Prime Furniture designs and builds factory-made, premium, wood armoires for homes. All are made of white oak. Its budgeted manufacturing overhead costs for the year 2012 are as follows.
Overhead Cost Pools ...........................................................Amount
Purchasing ........................................................................$ 40,000
Handling materials................................................................. 45,000
Production (cutting, milling, finishing) .......................................130,000
Setting up machines ...............................................................50,000
Inspecting ...........................................................................60,000
Inventory control (raw materials and finished goods) ........................80,000
Utilities .............................................................................105,000
Total budget overhead costs................................................... $510,000
For the last four years, Prime Furniture has been charging overhead to products on the basis of materials cost. For the year 2012, materials cost of $500,000 were budgeted. Wei Huang, owner-manager of Prime Furniture, recently directed her accountant, Tom Turkel, to implement the activity-based costing system that he has repeatedly proposed. At Wei Huang's request, Tom and the production manager identify the following cost drivers and their usage for the previously budgeted overhead cost pools.
Maria Carvalho, sales manager, has received an order for 10 luxury armoires from Cohn's Interior Design. At Maria's request, Tom prepares cost estimates for producing components for 10 armoires so Maria can submit a contract price per armoire to Cohn's. He accumulates the following data for the production of 10 armoires.
Direct materials ..........................................................$5,200
Direct labour .............................................................$3,500
Direct labour hours ..........................................................200
Number of purchase orders ...................................................3
Number of material moves ...................................................32
Number of machine set-ups ...................................................4
Number of inspections ........................................................20
Number of components ......................................................640
Number of square metres occupied ..........................................32
Instructions
(a) Calculate the predetermined overhead rate using traditional costing with materials cost as the basis.
(b) What is the manufacturing cost per armoire under traditional costing?
(c) What is the manufacturing cost per armoire under the proposed activity-based costing? (Prepare all of the necessary schedules.)
(d) Determine which of the two costing systems is preferable in pricing decisions and why.
Step by Step Answer:
Managerial Accounting Tools for Business Decision Making
ISBN: 978-1118033890
3rd Canadian edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso, Ibrahim M. Aly