Case Study

You are cost manager at Pristine Ltd which is the region's largest manufacturer of commercial and residential elegant cabinets and wood works. Due to the competitive market and technological advancements in almost every area of the business, the board of directors from the input of division's head and other senior management, has decided to shift from traditional costing techniques to activity based costing in order to arrive at more accurate cost per unit especially for the cabinets which is the top and most running product of the business. Activity based cost management (ABCM) is one of many new financial and accounting tools aimed at providing more complete, better-aligned data on economic performance. Pristine Ltd is preparing two types of storage cabinets, deluxe and executive and applies manufacturing overheads to all units at the rate of $1.20 per machine hour. Production information follows.

Deluxe ($)

Executive ($)

Direct material cost

52.50

90.00

Direct labor cost

30.00

30.00

Budgeted volume (units)

8000

15000

The management accountant has determined that the firm's overhead can be identified with three activities which are 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, follows.

Deluxe

Executive

Total

Setups

50

30

80

Machine hours

16000

22500

38500

Outgoing shipments

100

75

175

The firm's total overhead of $4,620,000 is subdivided as follows:

Manufactuing setups

$1,008,000

Machine processing

$2,772,000

Outgoing shipments

$840,000

Total Overheads

$4,620,000

Required:

1. Calculate the unit manufacturing cost of deluxe and executive cabinets by using the company's current overhead costing procedures.
2. Calculate the unit manufacturing cost of deluxe and executive cabinets by using activity based costing method.
3. Calculate the aggregate amount by which the deluxe cabinet line is undercosted/overcosted by the company's current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system undercosts/overcosts the executive cabinet line.
4. Assume that the current selling price of a deluxe cabinet is $390 and the marketing manager is contemplating $45 discount to stimulates sales. Is this discount advisable? Breifly discuss.