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You are cost manager at Pristine Ltd which is the regions largest manufacturer of commercial and residential elegant cabinets and wood works. Due to the

You are cost manager at Pristine Ltd which is the regions largest manufacturer of commercial and residential elegant cabinets and wood works. Due to the competitive market and technological advancements in almost every area of the business, the board of directors from the input of divisions head and other senior management, has decided to shift from traditional costing techniques to activity based costing in order to arrive at more accurate cost per unit especially for the cabinets which is the top and most running product of the business. Activity based cost management (ABCM) is one of many new financial and accounting tools aimed at providing more complete, better-aligned data on economic performance. Pristine Ltd is preparing two types of storage cabinets, deluxe and executive and applies manufacturing overheads to all units at the rate of $1.20 per machine hour. Production information follows.
Deluxe ($) Executive ($)
Direct material cost 52.50 90.00
Direct labor cost 30.00 30.00
Budgeted volume (units) 8000 15000
The management accountant has determined that the firms overhead can be identified with three activities which are manufacturing setups, machine processing and product shipping. Data on the number of setups, machine hours and outgoing shipments, which are the activities three respective cost drivers, follows.
Deluxe Executive Total
Setups 50 30 80
Machine hours 16000 22500 38500
Outgoing shipments 100 75 175
The firms total overhead of $4,620,000 is subdivided as follows:
Manufactuing setups $1,008,000
Machine processing $2,772,000
Outgoing shipments $840,000
Total Overheads $4,620,000
Required:
a) Calculate the unit manufacturing cost of deluxe and executive cabinets by using the companys current overhead costing procedures.
b) Calculate the unit manufacturing cost of deluxe and executive cabinets by using activity based costing method.
c) Calculate the aggregate amount by which the deluxe cabinet line is undercosted/overcosted by the companys current traditional overhead costing procedures. Then calculate the aggregate amount by which the traditional system undercosts/overcosts the executive cabinet line.
d) Assume that the current selling price of a deluxe cabinet is $390 and the marketing manager is contemplating $45 discount to stimulates sales. Is this discount advisable? Breifly discuss.

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