Use ABC to compute full product costs (Learning Objective 2)

McKinney manufactures bookcases. The company uses an ABC system to allocate all manufacturing conversion costs (direct labor and manufacturing overhead). McKinney’s activity areas and related data follow.

McKinney produced two styles of bookcases in April: the standard bookcase and an unfinished bookcase, which has fewer parts per bookcase and requires no finishing. The totals for quantities, direct materials costs, and other data follow.

Requirements 1. Compute the manufacturing product cost per unit of each type of bookcase.
2. Suppose that premanufacturing activities, such as product design, were assigned to the standard bookcases at $4 each and to the unfinished bookcases at $3 each. Similar analyses were conducted of postmanufacturing activities, such as distribution, marketing, and customer service. The postmanufacturing costs were $20 per standard bookcase and $15 per unfinished bookcase. Compute the full product costs per unit.
3. Which product costs are reported in the external financial statements? Which costs are used for management decision making? Explain the difference.
4. What price should McKinney’s managers set for unfinished bookcases to earn a unit profit of $16?

Transcribed Image Text:

Activity Budgeted Cost of Activity Materials handling $ 200,000 Assembling Finishing Allocation Base Number of parts 3,000,000 Direct labor hours 160,000 Number of finished units Cost Allocation Rate $ 0.80 15.00 3.90