P8.34 LO 8.5 8.6 Traditional and activity-based product costing: manufacturer Gladville Machinery manufactures two products, basic and superior, and applies overhead on the basis of direct labour hours. Anticipated overhead and direct labour time for the upcoming accounting period are $1920000 and 25000 hours, respectively. Information about the company's products follows: Basic Estimated product volume Direct material cost Direct labour per unit Superior Estimated product volume Direct material cost Direct labour per unit 3000 units $50 per unit 3 hours at $24 per hour 4000 units $80 per unit 4 hours at $24 per hour Gladville Machinery's overhead of $1920000 can be identified with three major activities: order processing ($360 000), machine processing ($1344000) and product inspection ($216000). These activities are driven by number of orders processed, machine hours worked and inspection hours, respectively. Data relevant to these activities follow: Basic Superior Total Order processed 330 220 550 Machine hours worked 19800 24 200 44000 Inspection hours 2200 8800 11000 Top management is very concerned about declining profitability despite a healthy increase in sales volume. The decrease in profit is especially puzzling because the company recently undertook a massive plant renovation during which new, highly automated machinery was installed-machinery that was expected to produce significant operating efficiencies. Required 1. Assuming use of direct labour hours to apply overhead to production, calculate the unit manufacturing costs of the basic and superior products if the expected manufacturing volume is attained. 2. Assuming use of activity-based costing, calculate the unit manufacturing costs of the basic and superior products if the expected manufacturing volume is attained. 3. Gladville Machinery's selling prices are based heavily on cost.

(a) Using direct labour hours as an application base, which product is overcosted and which product is undercosted? Calculate the amount of the cost distortion for each product.

(b) Is it possible that overcosting and undercosting (l.e. cost distortion) and the subsequent determination of selling prices are contributing to the company's profit woes? Explain. 4. Construct an Excel spreadsheet to solve requirements 1, 2 and 3

(a) above. Then show how the solution will change if the total overhead costs increase to $2484000 as a result of order processing costs increasing to $600000 and product inspection costs increasing to $540 000.P8.35 LO 8.5 8.6 Traditional and activity-based product costing: manufacturer Slimline Cabinets Ltd manufactures two types of storage cabinets, deluxe and executive, and applies manufacturing overhead to all units at the rate of $160 per machine hour. Production information follows. Direct material cost Direct labour cost Budgeted volume (units) Deluxe $70 40 8000 Executive $120 40 15000 The management accountant 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: Setups Machine hours Outgoing shipments Deluxe 50 Executive Total 30 80 16000 22 500 38 500 100 75 175 The firm's total overhead of $6160000 is subdivided as follows: manufacturing setups, $1344000; machine processing, $3696000; and product shipping, $1120000.

Required 1. Calculate the unit manufacturing cost of deluxe and executive cabinets by using the company's current overhead costing procedures. 2. Calculate the unit manufacturing cost of deluxe and executive cabinets by using activity-based costing. 3. Calculate the aggregate amount by which the deluxe cabinet line is undercosted/overcosted by the company's current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system undercosts/overcosts the executive cabinet line. 4. Assume that the current selling price of a deluxe cabinet is $520 and the marketing manager is contemplating a $60 discount to stimulate sales. Is this discount advisable? Briefly discuss.