Question

Given:

Maxey & Sons manufactures two types of storage cabinets—Type A and Type B—and applies manufacturing overhead to all units at the rate of $80 per machine hour. Production information follows.

Type A Type B
Anticipated volume (units) 8,000 15,000
Direct-material cost per unit $ 35 $ 60
Direct-labor cost per unit 20 20


The controller, who is studying the use of activity-based costing, has determined that the firm’s overhead can be identified with three activities: 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, follow.

Type A Type B Total
Setups 50 30 80
Machine hours 16,000 22,500 38,500
Outgoing shipments 100 75 175


The firm’s total overhead of $3,080,000 is subdivided as follows: manufacturing setups, $672,000; machine processing, $1,848,000; and product shipping, $560,000.


How do i find:

a) Compute the unit manufacturing cost of Type A and Type B storage cabinets by using activity-based costing


b) Is the cost of the Type A storage cabinet overstated or understated (i.e., distorted) by the use of machine hours to allocate total manufacturing overhead to production? By how much?

Answer 1

Instructions are listed below.

Step-by-step explanation:

Giving the following information:

Direct-material cost per unit $ 35 $ 60

Direct-labor cost per unit $20 $20

Type A Type B Total

Setups 50 30 80

Machine hours 16,000 22,500 38,500

Outgoing shipments 100 75 175

The firm’s total overhead of $3,080,000 is subdivided as follows: manufacturing setups, $672,000; machine processing, $1,848,000; and product shipping, $560,000.

Estimated manufacturing overhead rate= total estimated overhead costs for the period/ total amount of allocation base

Set up= 672,000/80= $8400 per setup

Machine processing= 1,848,000/38,500= $48 per machine hour

Shipping= 560,000/175= $3200 per shipping

Allocated MOH= Estimated manufacturing overhead rate* Actual amount of allocation base

Type A:

Set up= 8400*50= $420,000

Machine processing= 48*16,000= $768,000

Shipping= 3,200*100= 320,000

Total= 1,508,000

Unit cost Type A= 35 + 20 + (1,508,000/8,000units)= $243.5

Type B:

Set up= 8400*30= $252,000

Machine processing= 48*22,500= $1,080,000

Shipping= 3,200*75= 240,000

Total= 1,572,000

Unit cost Type B= 60 + 20 + (1,572,000/15,000)= $184.8

2) applied overhead= $80*16,000= 1,280,000

$300,000 understated