These birdhouses are available in three models: mini, deluxe and - 14626

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yousafbhutta

yousafbhutta

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  • From: Business,
  • Posted on: Thu 01 Nov, 2012
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Request Description

 

These birdhouses are available in three models: mini, deluxe and castle. The deluxe model has been manufactured for the years. The additional models were added to appeal to a broader customer base. Sales of the castle have skyrocketed while the company’s profits have steadily declined. Management has become concerned about the accuracy of its costing system.

Manufacturing overhead is assigned to products on the basis of direct labor hours. For the current year, the company has estimated that it will incur $993,750 in manufacturing overhead cost and produce 2,500 units of the mini, 15,000 of the deluxe and 7,500 units of the castle. Direct material and direct labor cost per units are as follows:

 

Model

Mini

Deluxe

Castle

Direct Materials

 $   12.50

 $         15

 $         20

Direct Labor

 $         10

 $         20

 $         45

 

The mini takes .4 direct labor hours per unit, the deluxe takes .8 direct labor hours per unit, and the castle uses 1.8 labor hours per unit. (Direct labor cost per hour is $25)

Required:

1.      Using a traditional product costing system with one plantwide overhead rate based on direct labor-hours as the basis for assigning manufacturing overhead cost to the products, compute the pre-determined overhead rate. Determine the unit cost of each of the models using the one overhead rate.

2.      Management is considering switching to an activity-based costing (ABC) system to apply manufacturing overhead costs to each model. A review of the manufacturing process has resulted in the following cost pools:

Machining

 Number of machine hours

 $                              600,000

 Assembling

 Number of parts

 $                              250,000

 Packaging

 Number of finished units

 $                              143,750

 Total Overhead Cost

 $                              993,750

 

Activity Measure

Model

Mini

Deluxe

Castle

Total

Machining

       100,000

       1,000,000

       1,400,000

       2,500,000

Assembling

            1,150

             50,000

             75,000

          126,150

Packaging

            2,500

             30,000

             15,000

             47,500

 

3.      Compute the activity rates for each of the three activity cost pools. Using these rates, determine the amount of manufacturing overhead to be applied to each model. Then calculate the cost per unit for each model (material, labor, and manufacturing overhead).

4.      Use your answers from requirements 1-3 to identify factors that may account for the company’s declining profits.

 

Solution Description

 

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