Question 1

Pacific Furniture produces two types of exotic tables for indoor and outdoor. Pacific Furniture uses direct materials and direct labour as its direct cost, and one indirect cost that is allocated based on machine hours. The current selected data for recent year is as follow:

Pacific Furniture has been using the traditional method for cost allocation, which allocates its indirect costs based on machine hours. Daniel, the manager of Pacific Furniture is interested in using the ABC system to improve its competitiveness in the current market. Therefore, Daniel collected the indirect cost activities as presented below:

Activity	Activity cost	Activity-cost driver
Production scheduling	$200,000	Production runs
Material handling	$45,000	Material moves
Machine set-up	$25,000	Machine set-ups
Assembly	$60,000	Machine-hours
Inspection	$8,000	Number of inspections

Marketing costs were determined to be 3% of the sales revenue for each type of table.

Required (show all workings)

a) Calculate manufacturing costs per unit for each type of table using the simple method that allocated indirect cost (overhead cost) based on machine hours.

b) Calculate manufacturing costs per unit for each type of table using Activity Based Costing (ABC).

Indoor 3,200 $125 $30 Outdoor 1,800 $200 $45 Units sold Selling price Direct material cost per unit Direct production labour cost per hour Direct production labour-hours per unit $16 $16 1.50 2.25 Production runs 40 85 Material moves 72 168 Machine set-ups 45 155 Machine-hours 5,500 4,500 Number of inspections 250 150