5-24 Activity based costing, manufacturing. Fancy Doors, Inc., produces 2 types of doors, interior & exterior. The Company's simple costing systemhas 2 direct cost categories (materials & labor) and 1 direct cost pool. The simple costing system allocates indirect costs on the basis of machine-hours. Recently, the owners of Fancy Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Fancy Doors production for the most recent year follows:

Interior Exterior

unit sold 3,200 1,800 Machine Set up 45 155

selling price $250 $400 machine-hours 5,500 4,500

direct material cost per unit $60 $90 number of inspection 250 150

direct manufacturing labor cost per hour $32 $32

direct manufacturing labor-hour per unit 1.50 2.25

production runs 40 85

material moves 72 168

the owners have heard of other companies in the industry that are now using an activity based costing system and are curious how an ABC system would affect their product costing decisions. After analyzing the indirect cost pool for Fancy Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine set-up, assembly, inspection, and marketing. Fancy Doors collected the following data related to the indirect cost activities:

activity activity cost activity cost driver

production scheduling $190,000 production runs

material handing $90,000 material moves

machine set-up $50,000 machine set-up

assembly $120,000 machine-hours

inspection $16,000 number of inspections

marketing costs were determined to be 3% of the sales revenue for each type of door.

1) calculate the cost of an interior door and an exterior door under the existing simple costing system.

2) calculate the cost of an interior door and an exterior door under an activity-based costing system.

3) compare the costs of the doors in requirements 1 and 2. Why do the simple and activity-based costing systems differ in the cost of an interior doors?

4) How might Fancy Door, Inc., use the new cost information from its activity-based costing system to address the declining market share for interior doors?