$5-26.$ ACTIVITY$-$BASED COSTING, MANUFACTURING. Decorative

Doors, Inc., produces two types of doors, interior and exterior. The company's simple costing system has two direct$-$cost categories $($materials and labor$)$ and one indirect$-$cost pool. The simple costing system allocates indirect costs on the basis of machine$-$hours. Recently, the owners of Decorative Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Decorative Doors production for the most recent year follows:

The owners have heard of other companies in the industry that are now using an activity$-$based costing system and are curious how an ABC system would affect their product costing decisions. After analyzing the indirect$-$cost pool for Decorative Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine setup, assembly, inspection, and marketing. Decorative Doors collected the following data related to the indirect$-$cost activities:

Marketing costs were determined to be $\backslash (3\backslash \%\backslash )$ of the sales revenue for each type of door.

Required

$1.$ Calculate the cost of an interior door and an exterior door under the existing simple costing system.

$2.$ Calculate the cost of an interior door and an exterior door under an activity$-$based costing system.

$3.$ Compare the costs of the doors in requirements $1$ and $2.$ Why do the simple and activity$-$based costing systems differ in the cost of an interior door and an exterior door?

$4.$ How might Decorative Doors, Inc., use the new cost information from its activity$-$based costing system to address the declining market share for interior doors?