(Using ABC to set price) The budgeted manufacturing overhead costs of Garage Door Company for 2001 are as follows:
Type of Cost Cost Amount Electric power $ 500,000 Work cells 3,000,000 Material handling 1,000,000 Quality control inspections 1,000,000 Product runs (machine setups) 500,000 Total budgeted overhead costs $6,000,000 For the last five years, the cost accounting department has been charging overhead production costs based on machine hours. The estimated budgeted capacity for 2001 is 1,000,000 machine hours.
Jason Tracy, president of Garage Door, recently attended a seminar on activity-
based costing. He now believes that ABC results in more reliable cost data that, in turn, will give the company an edge in pricing over its competitors.
On the president’s request, the production manager provided the following data regarding expected 2001 activity for the cost drivers of the preceding budgeted overhead costs.
Type of Costs Activity Drivers Electric power 100,000 kilowatt-hours Work cells 600,000 square feet Material handling 200,000 material moves Quality control inspections 100,000 inspections Product runs (machine setups) 50,000 product runs Linda Ryan, the VP of marketing, received an offer to sell 5,000 doors to a local construction company. Linda asks the head of cost accounting to prepare cost estimates for producing the 5,000 doors. The head of cost accounting accumulated the following data concerning production of 5,000 doors:
Direct material cost $100,000 Direct labor cost $300,000 Machine hours 10,000 Direct labor hours 15,000 Electric power—kilowatt-hours 1,000 Work cells—square feet 8,000 Number of material handling moves 100 Number of quality control inspections 50 Number of product runs (setups) 25 SOURCE: Adapted from Nabil Hassa, Herbert E. Brown, and Paul M. Saunders, “Management Accounting Case Study:
Beaver Window Inc.,” Management Accounting Campus Report (Fall 1990). Copyright Institute of Management Accountants, Montvale, N.J.

a. What is the predetermined overhead rate if the traditional measure of machine hours is used?

b. What is the manufacturing cost per door as presently accounted for?

c. What is the manufacturing cost per door under the proposed ABC method?

d. If the two cost systems will result in different cost estimates, which cost accounting system is preferable as a pricing base and why?