Question

Please show calculations

7 6 Leatherback Inc. manufactures two types of handbags-Standard and Custom-and applies manufacturing overhead to all units using machine hours. Production information follows. Standard Custom Totals 8 Anticipated volume (units) 58,500 31,200 89,700 9 Direct-material cost per unit 46 $ 69 115 10 Direct-labor cost per unit 111 11 12 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 purchase orders. Data on the number of setups, machine hours, and purchase orders, which are the activities' three respective cost drivers, 13 follow. 14 15 Setups 16 Machine hours 17 Purchase orders 18 Totals Standard 176 62,400 200 Custom 136 87,750 150 312 150,150 350 23 20 The firm's total overhead is: $23,423,400 21 It is subdivided as follows: manufacturing setups $5,110,560 22 machine processing $14,054,040 purchase orders $4,258,800 24 Required: 25 1. Compute the per unit total manufacturing cost of Standard and Custom handbags by using the company's current overhead costing procedures with machine hours.(8pts) 26 27 2. Compute the per unit total manufacturing cost of Standard and Custom handbags by using activity-based costing-(12pts) 28 29 3. Assume that the current selling price of a Standard handbag is $330.00 and the marketing manager is contemplating a $60 discount to stimulate volume. Is this discount advisable? Show calculations to support your answer.(2pts) 30 31 4.Which method should the company use and why? List at least 3 reasons why. (3pts) 32

Answer 1

Answer with working notes is given below

Traditional Overhead rate- Machine hour based Total Overheads $23,423,400 Total machine hours 150,150 $156.00 Per machine hour Machine hours Machine hour rate Total Overhead allocated Total output Overhead cost per unit Standard $62,400 $156 $9,734,400 $58,500 $166.40 Custom $87,750 $156 $13,689,000 $31,200 $438.75 Total manufacturing cost per unit- Traditional Costing Standard Custom Direct Material $46.00 $69.00 Direct Labor $51.00 $60.00 Total Overhead allocated $166.40 $438.75 Total manufacturing cost per unit) $263.401 $567.75 Calculation of Activity rates Activity Activity rate Total Overheads $5,110,560 $14,054,040 $4,258,800 $23,423,400 Total Activities 312 150,150 Manufacturing set ups Machine processing Purchase orders Total budgeted indirect costs $16,380.00 Per set up $93.60 Per machine hour $12,168.00 Per purchase order 350 Cost activity rate Activities used Allocated Cost Activity Standard 176 62,400 200 Custom 136 87,750 150 Manufacturing set ups $16,380.00 Machine processing $93.60 Purchase orders $12,168.00 Total ABC allocated indirect cost Total Volume Overhead cost per unit Standard $2,882,880 $5,840,640 $2,433,600 $11,157,120 58,500 $190.72 Custom $2,227,680 $8,213,400 $1,825,200 $12,266,280 A 31,200 B $393.15 A/B Total manufacturing cost per unit- ABC method Standard Direct Material $46.00 Direct Labor $51.00 Total Overhead allocated $190.72 Total manufacturing cost per unit) $287.72 Custom $69.00 $60.00 $393.15 As per above working $522.15 Standard handbag Current Selling price Discount Net selling price Cost as per ABC method Net Loss $330.00 $60.00 $270.00 $287.72 -$17.72 Discount is not advisable since after discount the net selling price is giving negative margin 4 ABC method should be used by the company since the allocation of cost is based on actual consumption of activities Allocation of overhead as per machine hour method does not correlate the cost with activities consumed ABC method should be used because -It helps in accurate product costing - It helps in Product pricing - It helps in better cost management through cost control and cost reduction