Q. 1 (Marks = 21) Decorative Doors Ltd produces two types of door, interior and exterior. The company's costing system has two direct-cost categories (materials and labour) and one indirect-cost pool. The 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: Interior 3200 $125 $30 $16 Exterior 1800 $200 $45 $16 1.50 2.25 Units sold/produced Selling price Direct material cost per unit Direct production labour cost per hour Direct production labour-hours per unit Production runs Material moves Machine set-ups Machine-hours Number of inspections 85 40 72 45 5500 250 168 155 4500 150 The owners have heard of other companies in the industry that are now using an ABC system and are curious how an ABC system would affect their product-costing decisions. After analysing the indirect- cost pool for Decorative Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine set-up, assembly, inspection and marketing. Decorative Doors collected the following data related to the indirect-cost activities: Activity Production scheduling Material handling Machine set-up Assembly Inspection Activity cost $180 000 $45 000 $25 000 $60 000 $8 000 Activity-cost driver Production runs Material moves Machine set-ups Machine-hours Number of inspections Marketing costs were determined to be 3% of the sales revenue for each type of door. Required a. Calculate the cost of an interior door and an exterior door under the existing costing system. (4 marks) b. Calculate the cost of an interior door and an exterior door under an activity-based costing system. (12 marks) c. Compare the costs of the doors in requirements 1 and 2. Why do the two costing systems differ in the cost of an interior and exterior door? (2.5 marks) d. How might Decorative Doors use the new cost information from its activity-based costing system to address the declining market share for interior doors? (2.5 marks)