Trimester 2, 2017 | ACC804 Advanced Management Accounting

Week 4 Lecture Illustration Example

Conventional and activity-based product costing: Manufacturer

(Adapted from Langfield-Smith, 2012, p. 386)

Locket Storage Ltd manufactures two types of storage cabinets-Deluxe and Executive- and
applies manufacturing overhead to all units at the rate of $80 per machine hour. Production
information follows:

Deluxe Executive
Direct material cost $35 $60
Direct labour cost 20 20
Budgeted volume (units) 8,000 15,000

The management accountant, who is studying activity-based costing, has determined that the
firms overhead can be identified with three activities: 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, follow:

Deluxe Executive Total

Setups 50 30 80
Machine hours 16,000 22,500 38,500
Outgoing shipments 100 75 175

The firms total overhead of $3,080,000 is subdivided as follows: manufacturing setups,

$672,000; machine processing, $1,848,000; and product shipping, $560,000.

Required:

1. Calculate the unit manufacturing cost of Deluxe and Executive cabinets by using the
companys current overhead costing procedures.
2. Calculate the unit manufacturing cost of Deluxe and Executive cabinets using activity-
based costing.
3. Is the cost of the Deluxe cabinet overstated or understated (i.e. distorted) by the use of
machine hours to allocate total manufacturing overhead to production? If so, by how
much?
4. Calculate the aggregate amount by which the Deluxe cabinet line is undercosted by the
companys current conventional overhead costing procedures. Then calculate the
aggregate amount by which the conventional system overcosts the Executive cabinet line.
5. Assume that the current selling price of a Deluxe cabinet is $260 and the marketing
manager is contemplating a $30 discount to stimulate sales. Is this discount advisable?
Briefly discuss.
 Solution:
1 Deluxe manufacturing overhead cost:
____________ machine hours ______ = ________________________
_______________ ________________ = ___________ per unit
Executive manufacturing overhead cost:
______________ machine hours _______ = _____________________
_________________ _____________ units = ___________ per unit

Deluxe Executive
Direct material
Direct labour
Manufacturing overhead
Unit cost

2 Activity-based application rates:

Activity Cost Activity driver Application rate
_________________ _________ ____ setups (SU) = ________ per SU
_______ machine
_________________ _________ hours (MH) = _______ per MH
_______ outgoing
_________________ _________ shipments (OS) = ________ per OS

Manufacturing setup, machine processing and product shipping costs of a Deluxe unit and an Executive unit:
Activity Deluxe Executive
Manufacturing setups:
____ SU _________
____ SU _________

Machine processing:
________ MH ______
________ MH ______

Product shipping:
______ OS ________
______ OS ________

Total .. $_________ $_________

Production volume (units) __________ __________

Cost per unit . __________* __________**
* ___________ __________units = _________________
** ____________ ____________ units = ____________
The manufactured cost of a Deluxe cabinet is _____________ and the manufactured cost of an Executive
cabinet is _____________. The calculations follow:
 Deluxe Executive
Direct material
Direct labour
Manufacturing setup, machine
processing, and outgoing shipments
Total cost.

3 The Deluxe storage cabinet is __________________. The use of machine hours produced a unit cost of
______; in contrast, the more accurate activity-based costing approach shows a unit cost of ___________.
The difference between these two amounts is ___________.

4 Cost distortion:
The Deluxe cabinet product line is undercosted by ______________, and the Executive cabinet product line
is overcosted by ______________. Supporting calculations follow:

Deluxe Executive
__________*__________=____________ _________ ________= _______________

*
____________ ____________ ____________ ______________

5
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