Question 2 Doha 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 Doha Doors have been concerned about a decline in the market share for their interior dooors, usually their biggest seller. Information related to Doha Doors production for the most recent year follows: Units Sold Selling Price Direct material cost per unit Direct manufacturing labor cost per hour Direct manufacturing labor hours per unit Production runs Material moves Machine setups Machine hours Number of inspections Interior Exterior 5,400 2,900 $255 $470 $95 $130 $15 $15 2 3 50 115 93 205 45 175 11,700 415 6,300 270 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 costing decisions. After analyzing the indirect cost pool for Doha Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine setup, assembly, inspection and marketing. Doha Doors collected data related to the indirect cost activities as displayed in the table below. Activity Production scheduling Activity Cost $ 118,000 Material handling 55,040 Machine setup 26,700 Assembly 90,000 Inspection 20,520 Marketing costs were determined to be 2% of the Marks sales revenue for each type of door Total Requirements: 1.) Compute the overhead allocation rate. Overhead allocation rate: 2.) Calculate the cost of an interior door and an exterior door under the exisiting simple costing system. Item Interior Exterior Total Manufacturing Cost Cost per Unit 3.) Select an allocation base (cost driver) for each activity and calculate the activity rate per unit for each activity. Activity Production scheduling Material handling Activity Cost $ 118,000 55,040 Cost Driver Quantity Cost Driver Activity Rate/Unit Machine setup 26,700 Assembly 90,000 Inspection 20,520 Marketing costs were determined to be 2% of the sales revenue for each type of door 4.) Calculate the cost of an interior door and an exterior door under an activity-based costing system. Item Total Manufacturing Cost Cost per Unit Interior Exterior 5.) Compare the costs of the doors under a simple costing system and an activity-based costing system. Why do the costs differ under each of these systems for an interior door and an exterior door? 1 1 4 4 5 10 5