Decorative 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 Decorative Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Decorative Doors production for the most recent year follows: a (Click the icon to view the production data.) 0 (Click the icon to view additional information.) Read the @uirements. Requirements 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 and exterior door'? 4. How might Decorative Doors. Inc., use the new cost information from its activity-based costing system to address the declining market share for interior doors? Decorative 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 Decorative Doors have been conoemed about a decline in the market share for their interior doors, usually their biggest seller. Information related to Decorative Doors production for the most recent year follows: a (Click the icon to view the production data.) 0 (Click the icon to view additional information.) Read the muirements. Data Table More Info 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 Unlts sold 31000 1,600 costing decisions. After analyzing the indirect cost pool for Decorative Doors, the owners identity six activities as generating indirect costs: production scheduling, material handling, Selling price 140 $ 230 machine setup, assembly. inspection, and marketing. Decorative Doors collected the following data related to the indirect cost activities: Interior Exterior Direct material cost per unit 45 $ 65 Direct manufacturing labor cost per hour 18 $ 18 Activity Actlvlty Cost Actlvlty Cost Driver Direct manufacturing labor-hours per unit 1.40 Production scheduling 86,900 Production runs Production runs 35 Material handling 42,120 Material moves Materlal moves 72 Machine setup 23,450 Machine setups Machine setups 35 Assembly 60,000 Machine-hours Machine-hours Inspection 13,600 Number of inspections Number of inspections Marketing costs were determined to be 4% of the sales revenue for each type of door. Now calculate the cost per Requirement 1. Calculate the cost of an interior door and an exterior door under the existing simple costing system. Before calculating the cost of an interior and exterior door, begin by calculating the overhead rate under the simple costing system. First select the formula, then enter the applicable amounts and calculate the rate. (Round your answer to the nearest cent, Abbreviations used: bgt. = budgeted, qty = quantity.) Budgeted overhead rate Bgt. total costs in indirect cost pool + Bgt. total qty of cost allocation base = Simple costing system 5 257,590 + 10,000 = $25.76 permachine-hour Now calculate the cost of an interior door and an exterior door under the existing simple costing system. Start by calculating total costs and then calculate the cost per unit for each product. (Round interim calculations to the nearest cent and your nal answers to the nearest whole dollar.) Simple costing system Interior Exterior Direct materials cost $ 135,000 5 104,000 Direct manufacturing labor cost 75,600 66,240 Indirect cost allocated A A 3 365,160 $ 273,280 Total costs Now calculate the cost per unit for each product under the simple costing system. (Round your answers to the nearest cent.) Simple costing system Interior Exterior Total cost per unit 3 121.72 $ 170.80 Requirement 2. Calculate the cost of an interior door and an exterior door under an activity-based costing system. Begin by calculating the ABC allocation rate for each activity. First select the formula, then enter the applicable amounts and calculate the rates. (Round your answers to the nearest cent. Abbreviations used: Bgt. = Budgeted, mach. = machine, mat. = material, prod. = production, sch. = scheduling, qty. = quantity.) Bgt. cost of activity + Bgt. total qty. of cost allocation base = ABC allocation rate Prod. sch. EA 86,900 110 $ 790.00 per prod. run Mat. handling 42, 120 234 $ 180.00 per mat. move Mach. setup 23,450 175 $ 134.00 per mach. setup Assembly 60,000 10,000 $ 6.00 per mach. hour EA Inspection 13,600 $ 340 = $ 40.00 per inspection Now calculate the cost of an interior door and an exterior door under an activity-based costing system. (Round interim calculations to the nearest cent and your final answers to the nearest whole dollar.) ABC costing system Interior Exterior Direct materials cost $ 135,000 $ 104,000 Direct manufacturing labor cost 75,600 66,240 Indirect costs allocated: Production scheduling 27,650 59,250 Materials handling 12,960 29, 160 Machine setup 4,690 18,760 Assembly 36,000 24,000 Inspection 8,400 5,200 16,800 14,720 Marketing 317, 100 $ 321,330 Total costs Now calculate the cost per unit for each product under ABC. (Round your answers to the nearest cent.) ABC costing system Interior Exterior Total cost per unit $ 105.70 $ 200.83Requirement 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 and exterior door! Relative to the ABC system, the simple costing system overcosts interior doors and underoosts exterior doors. Under the simple costing system, the volume of the production of interior doors is driving the amount of overhead allocated to the interior doors. The ABC study reveals that each exterior door requires more production runs, material moves, and setups . Thi is reected in the higher indirect costs allocated to exterior doors in the ABC system. Requirement 4. How might Decorative Doors, |nc., use the new cost information from its activity-based costing system to address the declining market share for interior doors? (Select all choices that apply.) El A. Decorative Doors should consider increasing the price of its exterior doors, depending on the competition it faces in this market. I] B. Decorative Doors, Inc. should consider decreasing the price of its exerior doors to be more competitive. I] c. Decorative Doors, Inc. should consider increasing the price of its interior doors depending on the competition it faces in this market. E] D. Decorative Doors can use the ABC information to improve its own operations. It could examine each of the indirect cost categories and analyze whether it would be possible to deliver the same level of service, but consume fewer indirect resources, or nd a way to reduce the per-unit-cost-dr'wer cost of some of those indirect resources. I] E. Decorative Doors, Inc. can use the information revealed by the ABC system to change its pricing based on the ABC costs. E] F. Decorative Doors, Inc. should consider decreasing the price of its interior doors to be more competitive