Allocation of Overheads

Edge Manufacturing produces two types of entry doors: Deluxe and Standard. The assignment basis for support costs has been direct labor dollars. For 2009, Edge Manufacturing compiled the following data for the two products:

	Deluxe	Standard
Sales units	$50,000	$400,000
Sales price per unit	$650.00	$475.00
Direct material and labor costs per unit	$180.00	$130.00
Manufacturing support costs per unit	$80.00	$120.00

Last year, Edge Manufacturing purchased an expensive robotics system to allow for more decorative door products in the deluxe product line. The CFO suggested that an ABC analysis could be valuable to help evaluate a product mix and promotion strategy for the next sales campaign.

She obtained the following ABC information for 20X5:

Activity	Cost Driver	Cost	Total	Deluxe	Standard
Setups	# of setups	$500,000	500	400	100
Machine-related	# of machine hours	$44,000,000	600,000	300,000	300,000
Packing	# of shipments	$5,000,000	250,000	50,000	200,000

NB.: # = number

a. Using the activity-based costing data presented above:

1. Compute the cost-driver rate for each overhead activity.

2. Compute the manufacturing overhead cost per unit for each type of entry door.

3. Compute the total cost to manufacture one unit of each type of entry door.

b. Why would the CFO consider an ABC analysis to be valuable?