Concept explainers
Activity-based
Interior | Exterior | |
Units sold | 3,200 | 1,800 |
Selling price | $ 125 | $ 200 |
Direct material cost per unit | $ 30 | $ 45 |
Direct manufacturing labor cost per hour | $ 16 | $ 16 |
Direct manufacturing labor-hours per unit | 1.50 | 2.25 |
Production runs | 40 | 85 |
Material moves | 72 | 168 |
Machine setups | 45 | 155 |
Machine-hours | 5,500 | 4,500 |
Number of inspections | 250 | 150 |
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 | Activity Cost | Activity Cost Driver |
Production scheduling | $95,000 | Production runs |
Material handling | $45,000 | Material moves |
Machine setup | $25,000 | Machine setups |
Assembly | $60,000 | Machine-hours |
Inspection | $ 8,000 | Number of inspections |
Marketing costs were determined to be 3% of the sales revenue for each type of door.
- 1. Calculate the cost of an interior door and an exterior door under the existing simple costing system.
Required
- 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?
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Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
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