Question
Before the Amplifier is a manufacturer of guitars. The company sells acoustic and electric guitars. The electric guitar line is not as profitable as expected
Before the Amplifier is a manufacturer of guitars. The company sells acoustic and electric guitars. The electric guitar line is not as profitable as expected despite high production levels. Management is concerned that the price of the electric guitar line is too high in comparison to its competitors and is considering switching to ABC to improve costing accuracy. Currently, manufacturing overhead is applied to production based on DL hours and Before the Amplifier sets its sales prices by marking up unit product costs.
Activity | Cost Driver | MOH Cost |
Assembly | DL hours logged | $500 |
Machining | Machine hours logged | $1,500 |
Setting up Equipment | Number of Setups | $1,200 |
Moving Goods | Number of Moves | $800 |
Each Acoustic guitar requires 1 direct labor hour and 0.5 machine hours to produce. Each Electric guitar requires 0.8 direct labor hours and 0.4 machine hours to produce. The production equipment is setup for every 5 Acoustic guitars produced and for every 25 Electric guitars produced. Acoustic guitars are moved during production in groups of 20 guitars; Electric guitars are moved during production is groups of 25 guitars.
The direct material cost per Acoustic guitar is $60 and the direct material cost per Electric guitar is $70. Direct Laborers are paid at a rate of $25 per hour. The projected production levels for the period are 20 Acoustic guitars and 100 Electric guitars.
- Calculate the total per unit cost for both the acoustic guitar line and the electric guitar line under the current system and the ABC system.
- Determine the amount by which the lines are over/undercosted IN TOTAL.
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