Question
The Instyle produces only two products: Leather Bags and Leather Shoes. The company uses a normal cost system and overhead costs are currently allocated using
- The Instyle produces only two products: Leather Bags and Leather Shoes. The company uses a normal cost system and overhead costs are currently allocated using a plant-wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products. The company expects to produce 4,000 leather bags and 2,000 leather shoes in 2017. Each leather bag requires two direct labor hours to produce and each pair of shoe requires half hour to produce. Material and labour costs are given below:
Bags Shoes
Direct material cost/unit $30 $17
Direct labour cost/unit $16 $4
Budgeted (Estimated) Total Factory Overhead Data For 2017:
Activity | Budgeted Overhead Dollars | Estimated Volume Level |
Production Setups | $80,000 | 20 setups |
Material Handling | $70,000 | 5,000 lbs. |
Packaging and Shipping | $120,000 | 6,000 boxes |
Total Factory Overhead | $270,000 |
Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows in 2017:
Activity | Leather Bags | Leather Shoes | Overall Totals |
Production Setups | 5 setups | 15 setups | 20 setups |
Material Handling | 1,000 lbs. | 4,000 lbs. | 5,000 lbs. |
Packaging and Shipping | 4,000 boxes | 2,000 boxes | 6,000 boxes |
Required:
Calculate the cost of each product using Traditional method
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