AC3251 - Quiz 1

Question 2

Doha Doors, Inc., produces two types of doors, interior and exterior. The company's simple costing system has two direct cost categories (materials and labor) and one indirect cost pool. The simple costing system allocates indirect costs on the basis of machine-hours. Recently, the owners of Doha Doors have been concerned about a decline in the market share for their interior dooors, usually their biggest seller. Information related to Doha Doors production for the most recent year follows:

Interior Exterior

Units Sold 5,400 2,900

Selling Price $255 $470

Direct material cost per unit $95 $130

Direct manufacturing labor cost per hour $15 $15

Direct manufacturing labor - hours per unit 2 3

Production runs 50 115

Material moves 93 205

Machine setups 45 175

Machine hours 11,700 6,300

Number of inspections 415 270

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 Doha Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine setup, assembly, inspection and marketing. Doha Doors collected data related to the indirect cost activities as displayed in the table below.

Marks

Activity

Activity Cost

Production scheduling 118,000

Material handling 55,040

Machine setup 26,700

Assembly 90,000

Inspection 20,520

Marketing costs were determined to be 2% of the sales revenue for each type of door

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Total 1

Requirements:

1.) Compute the overhead allocation rate. 4

Overhead allocation rate:

2.) Calculate the cost of an interior door and an exterior door under the exisiting simple costing system.

4

Item Interior Exterior

Total Manufacturing Cost

Cost per Unit

3.) Select an allocation base (cost driver) for each activity and calculate the activity rate per unit for each activity.

5

Activity

Activity Cost

Cost Driver

Quantity Cost Driver

Activity Rate / Unit

Production scheduling 118,000

Material handling 55,040

Machine setup 26,700

Assembly 90,000

Inspection 20,520

Marketing costs were determined to be 2% of the sales revenue for each type of door

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

10

Item Interior Exterior

Total Manufacturing Cost

Cost per Unit

5.) Compare the costs of the doors under a simple costing system and an activity-based costing system. Why do the costs differ under each of these systems for an interior door and an exterior door?

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