Question 4

Time: 33 minutes

Total: 20 marks

A company manufactures household items sold at trade shows. The items, classified as either Tables or Frames, are manufactured on a common assembly line. Although different direct materials are used, the direct labour cost is the same for each product line.

The plant-wide rate for allocating manufacturing overhead to its products is no longer acceptable. The production manager has heard about activity-based costing and has assembled some information for use in changing the cost system to a cost driver concept.

With the help of the accounting department, the manager has been able to establish the following relationships between production costs and some of the indirect manufacturing activities for July, along with the production data for the two product lines:

activity	Cost driver	Allocation rate	tables	frames
Material handling	Number of parts	$2.40 per part	2,000	1,300
Machining	Machine hours	$15.00 per hour	205	300
Assembly	Units began	$1.60 per unit	1,000	1,300
Inspection	Number tested	$2.00 per unit	100	1,200

Direct costs:

	Tables	Frames
Labour	$7,000	$7,000
Materials	$7,200	$4,600

Submission Instructions:

Using activity-based costing determine the total production cost of each of the two product lines for July and the cost per unit, assuming all units started were completed.