Question
The I. Swiatek Company manufactures two models of compact disc players: a deluxe model and a regular model. The company has manufactured the regular model
The I. Swiatek Company manufactures two models of compact disc players: a deluxe model and a regular model. The company has manufactured the regular model foryears; the deluxe model was introduced recently to tap a new segment of themarket. Since the introduction of the deluxe model, the company's profitshave steadily declined, and management has become increasingly concernedabout the accuracy of its costing system. Sales of the deluxe model have beenincreasing rapidly.
The current cost accounting system allocates manufacturing support
costs to the two products on the basis of direct labor hours. The company has
estimated that this year it will incur $1 million in manufacturing support
costs and will produce 5,000 units of the deluxe model and 40,000 units of
the regular model. The deluxe model requires 2 hours of direct labor, and the
regular model requires 1 hour. Material and labor costs per unit and selling
price per unit are as follows:
ITEM DELUXE REGULAR
Direct materials cost $45 $30
Direct labor cost $20 $10
Selling price 140 $80
Required:
4a. Compute the manufacturing support cost driver rate for this year.
4b. Determine the cost to manufacture one unit of each model.
4c.The company has decided to trace manufacturing support costs to four activities.
Following are the amount of manufacturing support costs traceable to the four activities
this year:
COST DRIVER UNITS
ACTIVITY COST DRIVER COST TOTAL DELUXE REGULAR
Purchase orders Number of orders $180,000 600 200 400
Quality control Number of inspections 250,000 2,000 1,000 1,000
Product setups Number of setups 220,000 200 100 100
Machine maintenance Machine hours 350,000 35,000 20,000 15,000
$1,000,000
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Compute the total cost to manufacture one unit of each model.
4d. Compare the manufacturing activity resources demanded per unit of the regular model
and per unit of the deluxe model. Why did the old costing system under-cost the deluxe
model?
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