Decorative Doors, Inc, produces two types of doors, inte- rior 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 concemed 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: Exterior Interior Units sold Selling price Direct material cost per unit Direct manufacturing labor cost per hour Direct manufacturing labor-hours per unit Production runs 3,200 1,800 $ 200 $ 125 $ 30 $ 45 $ 16 $ 16 1.50 225 40 85 Material moves 12 168 155 Machine setups Machine-hours 45 5,500 250 4,500 150 Number of inspections 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: Activity Cost Driver Activity Cost $5,000 $45,000 $25,000 SO0,000 $ 8,000 Activity Production scheduling Material handling Machine setup Assembly Inspection Production runs Material moves Machine setups Machine-hours Number of inspections Marketing costs were determined to be 3% of the sales revenue for each type of door.
Decorative Doors, Inc, produces two types of doors, inte- rior 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 concemed 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: Exterior Interior Units sold Selling price Direct material cost per unit Direct manufacturing labor cost per hour Direct manufacturing labor-hours per unit Production runs 3,200 1,800 $ 200 $ 125 $ 30 $ 45 $ 16 $ 16 1.50 225 40 85 Material moves 12 168 155 Machine setups Machine-hours 45 5,500 250 4,500 150 Number of inspections 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: Activity Cost Driver Activity Cost $5,000 $45,000 $25,000 SO0,000 $ 8,000 Activity Production scheduling Material handling Machine setup Assembly Inspection Production runs Material moves Machine setups Machine-hours Number of inspections Marketing costs were determined to be 3% of the sales revenue for each type of door.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Q.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?
Transcribed Image Text:Decorative Doors, Inc, produces two types of doors, inte-
rior 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 concemed 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:
Exterior
Interior
Units sold
Selling price
Direct material cost per unit
Direct manufacturing labor cost per hour
Direct manufacturing labor-hours per unit
Production runs
3,200
1,800
$ 200
$ 125
$ 30 $ 45
$ 16 $ 16
1.50
225
40
85
Material moves
12
168
155
Machine setups
Machine-hours
45
5,500
250
4,500
150
Number of inspections
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:
Activity Cost Driver
Activity Cost
$5,000
$45,000
$25,000
SO0,000
$ 8,000
Activity
Production scheduling
Material handling
Machine setup
Assembly
Inspection
Production runs
Material moves
Machine setups
Machine-hours
Number of inspections
Marketing costs were determined to be 3% of the sales revenue for each type of door.
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