Peter Company produces mathematical and financial calculators and operates at capacity. Data related to the two products are presented here. (Click the icon to view the data.) Total manufacturing overhead costs are as follows: (Click the icon to view the overhead costs.) Requirements 1. Choose a cost driver for each overhead cost pool and calculate the manufacturing overhead cost per unit for each product. 2. Compute the manufacturing cost per unit for each product. 3. How might Peter's managers use the new cost information from its activity-based costing system to better manage its business? Requirement 1. Choose a cost driver for each overhead cost pool and calculate the manufacturing overhead cost per unit for each product. Begin by choosing a cost driver for each overhead cost pool. Activity Machining Set up Inspection Rate 6 per machine-hour Cost driver Machine-hours Production runs $ 1,350 per production run Inspection-hours $ 85 per inspection-hour Determine the formula to calculate the overhead allocated to each product. Indirect-cost rate Product quantity of allocation base = Overhead allocated to product Now calculate the total overhead allocated to each product and the overhead cost per unit. (Round your answer to the nearest cent.) Mathematical Machining costs Setup costs Inspection costs Total overhead costs EA Financial 120,000 $ 240,000 54,000 54,000 68,000 34,000 242,000 $ 328,000 Setup costs Inspection costs Total overhead costs Divide by number of units Manufacturing overhead cost per unit 54,000 54,000 68,000 34,000 $ 242,000 $ 328,000 50,000 100,000 4.84 $ 3.28 Requirement 2. Compute the manufacturing cost per unit for each product. Determine the formula to calculate the direct costs per unit. Direct cost of product Units produced of product = Direct cost per unit Now compute the manufacturing cost per unit for each product. Mathematical Financial Direct materials per unit 4.00 $ 4.00 Direct labor per unit 1.50 1.50 Manufacturing overhead per unit 4.84 3.28 $ 10.34 $ 8.78 Manufacturing cost per unit Requirement 3. How might Peter's managers use the new cost information from its activity-based costing system to better manage its business? (Select all that apply.) A. Managers can use this information for pricing and product-mix decisions, and for cost reduction and process-improvement decisions. B. Managers can use this information to improve advertising campaigns and their public image. C. Managers can use this information to devise employee compensation packages. D. Managers can use this information for design decisions, and to plan and manage activities. Elegant 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 Elegant Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Elegant Doors production for the most recent year follows: (Click the icon to view the production data.) Read the requirements. i (Click the icon to view additional information.) 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 263,618 Bgt. total qty of cost allocation base 10,000 = Simple costing system = $ 26.36 per machine-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 final answers to the nearest whole dollar.) Simple costing system Direct materials cost Direct manufacturing labor cost Indirect cost allocated Total costs Interior Exterior 150,000 128,000 84,000 78,400 158,160 105,440 $ 392,160 $ 311,840 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 Simple costing system Total cost per unit Interior Exterior 130.72 $ 194.90 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.) Prod. sch. Mat. handling Mach. setup Assembly Inspection SA SA EA Bgt. cost of activity 78,100 40,248 24,790 70,000 22,000 Bgt. total qty. of cost allocation base = ABC allocation rate 110 = $ 710.00 per prod. run 234 = $ 172.00 per mat. move 185 = $ EA 10,000 400 = = $ EA 134.00 per mach. setup 7.00 per mach. hour 55.00 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 Direct materials cost Direct manufacturing labor cost Exterior 150,000 $ 128,000 84,000 78,400 Indirect costs allocated: Production scheduling 24,850 53,250 Materials handling 12,384 27,864 Machine setup 4,020 20,770 Assembly 42,000 28,000 Inspection 13,200 8,800 Marketing Total costs 14,400 344,854 $ 14,080 359,164 Now calculate the cost per unit for each product under ABC. (Round your answers to the nearest cent.) ABC costing system Total cost per unit Interior Exterior 114.95 $ 224.48 Requirement 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 door and an exterior door? Relative to the ABC system, the simple costing system overcosts interior doors and undercosts 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. This is reflected in the higher indirect costs allocated to exterior doors in the ABC system. Requirement 4. How might Elegant Doors, Inc., 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.) A. Elegant Doors should consider increasing the price of its exterior doors, depending on the competition it faces in this market. B. Elegant Doors, Inc. should consider decreasing the price of its exerior doors to be more competitive. C. Elegant Doors, Inc. should consider decreasing the price of its interior doors to be more competitive. D. Elegant Doors, Inc. can use the information revealed by the ABC system to change its pricing based on the ABC costs. E. Elegant 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 find a way to reduce the per-unit-cost-driver cost of some of those indirect resources. F. Elegant Doors, Inc. should consider increasing the price of its interior doors depending on the competition it faces in this market.