Teledor Inc. manufactures boomboxes (music systems with radio, MP3, and compact disc players) for different well-known companies. The boomboxes differ significantly in their complexity and the batch sizes in which they are manufactured. The following costs were incurred in 2015:
a. Indirect manufacturing labour costs such as supervision that supports direct manufacturing labour, $1,500,000.
b. Procurement costs of placing purchase orders, receiving materials, and paying suppliers that are related to the number of purchase orders placed, $800,000.
c. Cost of indirect materials, $450,000.
d. Costs incurred to set up machines each time a different product needs to be manufactured, $900,000.
e. Designing processes, drawing process charts, making engineering process changes for products, $900,000.
f. Machine-related overhead costs such as depreciation, maintenance, production engineering, $1,200,000. These resources are related to the activity of running the machines.
g. Plant management, plant rent, and insurance, $950,000.
Required
1. Classify each of the preceding costs as output unit-level, batch-level, product-sustaining, or facility sustaining.
Explain your answers.
2. Consider two boomboxes made by Teledor Inc. One boombox is complex to make and is made in many small batches. The other boombox is simple to make and is made in a few large batches. Suppose that Teledor needs the same number of machine-hours to make either boombox. If Teledor allocated all overhead costs using machine-hours as the only allocation base, how, if at all, would the boomboxes be miscosted? Briefly explain why.
3. How is the cost hierarchy helpful to Teledor in managing its business?