Question
Stylish 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
Stylish 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 Stylish Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Stylish Doors production for the most recent year follows:
| Interior | Exterior | |||
| Units sold | 3,100 | 1,700 | ||
| Selling price | $140 | $215 | ||
| Direct material cost per unit | $60 | $90 | ||
| Direct manufacturing labor cost per hour | $20 | $20 | ||
| Direct manufacturing labor-hours per unit | 1.60 | 2.30 | ||
| Production runs | 30 | 65 | ||
| Material moves | 70 | 160 | ||
| Machine setups | 35 | 135 | ||
| Machine-hours | 5,500 | 4,500 | ||
| Number of inspections | 250 | 170 | ||
The owners have heard of other companies in the industry that are now using anactivity-based costing system and are curious how an ABC system would affect their product costing decisions. After analyzing the indirect cost pool for Stylish Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine setup, assembly, inspection, and marketing.Stylish Doors collected the following data related to the indirect cost activities:
| Activity | Activity Cost | Activity Cost Driver | |
| Production scheduling | $74,100 | Production runs | |
| Material handling | $42,320 | Material moves | |
| Machine setup | $20,400 | Machine setups | |
| Assembly | $80,000 | Machine-hours | |
| Inspection | $18,900 | Number of inspections | |
Marketing costs were determined to be 2% of the sales revenue for each type of door.
Requirements
| 1. | Calculate the cost of an interior door and an exterior door under the existing simple costing system. |
| 2. | Calculate the cost of an interior door and an exterior door under anactivity-based costing system. |
| 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 and exteriordoor? |
| 4. | How might StylishDoors, Inc., use the new cost information from its activity-based costing system to address the declining market share for interiordoors? |
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 | |||||
| / | = | Simple costing system | |||
| / | = | ||||
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 | Interior Exterior |
| Direct materials cost | |
| Direct manufacturing labor cost | |
| Indirect cost allocated | |
| Total costs |
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 |
| Total cost per unit |
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.)
| / | = | ABC allocation rate | ||||
| Prod. sch. | / | = |
| Mat. handling | / | = |
| Mach. setup | / | = |
| Assembly | / | = |
| 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.)
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.)
| / | = | ABC allocation rate | ||||
| Prod. sch. | / | = |
| Mat. handling | / | = |
| Mach. setup | / | = |
| Assembly | / | = |
| 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 / Exterior |
| Direct materials cost |
|
| Direct manufacturing labor cost |
|
| Indirect costs allocated: |
|
| Production scheduling |
|
| Materials handling |
|
| Machine setup |
|
| Assembly |
|
| Inspection |
|
| Marketing |
|
| Total costs |
|
Now calculate the cost per unit for each product under ABC. (Round your answers to the nearest cent.)
| ABC costing system | Interior | Exterior |
| Total cost per unit |
|
|
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