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Sia

13670960693's Question
Math
Posted 3 months ago

5-26 Activity-based costing, manufacturing. Decorative
, ints-
rior 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 machinehours. Recently, the owners of Decorative Doors have been concerned about a decline in the market share for their interior doors, usually their biggest seller. Information related to Decorative Doors production for the most recent year follows:
\begin{tabular}{lcc} 
& Interior & Exterior \\
\hline Units sold & 3,200 & 1,800 \\
Selling price & $125\$ 125 & $200\$ 200 \\
Direct material cost per unit & $30\$ 30 & $45\$ 45 \\
Direct manufacturing labor cost per hour & $16\$ 16 & $\$ \\
Direct manufacturing labor-hours per unit & 1.50 & 2.25 \\
Production runs & 40 & 85 \\
Material moves & 72 & 168 \\
Machine setups & 45 & 155 \\
Machine-hours & 5,500 & 4,500 \\
Number of inspections & 250 & 150
\end{tabular}

The owners have heard of other companies in the industry that are now using an activity-based costing system and are curious how an ABC system would affect their product costing decisions. After analyzing the indirect-cost pool for Decorative Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine setup, assembly, inspection, and marketing. Decorative Doors collected the following data related to the indirect-cost activities:
\begin{tabular}{lcl} 
Activity & Activity Cost & Activity Cost Driver \\
\hline Production scheduling & $95,000\$ 95,000 & Production runs \\
Material handling & $45,000\$ 45,000 & Material moves \\
Machine setup & $25,000\$ 25,000 & Machine setups \\
Assembly & $60,000\$ 60,000 & Machine-hours \\
Inspection & $8,000\$ 8,000 & Number of inspections
\end{tabular}

Marketing costs were determined to be 3%3 \% of the sales revenue for each type of door.
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 an activity-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 door and an exterior door?
4. How might Decorative Doors, Inc., use the new cost information from its activity-based costing system to address the declining market share for interior doors?
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Answer from Sia
Posted 3 months ago
Solution by Steps
step 1
Calculate the cost of an interior door under the existing simple costing system. The total cost includes direct material cost, direct labor cost, and allocated indirect costs. The indirect cost per machine hour is calculated as follows: Total Indirect Costs=Total Indirect Cost Pool/Total Machine Hours \text{Total Indirect Costs} = \text{Total Indirect Cost Pool} / \text{Total Machine Hours} Given that the total indirect cost pool is 95,000+45,000+25,000+60,000+8,000=233,00095,000 + 45,000 + 25,000 + 60,000 + 8,000 = 233,000 and total machine hours for both doors is 5,500+4,500=10,0005,500 + 4,500 = 10,000, we find: Indirect Cost per Machine Hour=233,00010,000=23.3 \text{Indirect Cost per Machine Hour} = \frac{233,000}{10,000} = 23.3 Thus, the total cost for an interior door is: Costinterior=30+(1.5×16)+(5,500/3,200×23.3)=30+24+10.9=64.9 \text{Cost}_{\text{interior}} = 30 + (1.5 \times 16) + (5,500/3,200 \times 23.3) = 30 + 24 + 10.9 = 64.9
step 2
Calculate the cost of an exterior door under the existing simple costing system using the same method. The total cost for an exterior door is: Costexterior=45+(2.25×16)+(4,500/1,800×23.3)=45+36+29.25=110.25 \text{Cost}_{\text{exterior}} = 45 + (2.25 \times 16) + (4,500/1,800 \times 23.3) = 45 + 36 + 29.25 = 110.25
step 3
Calculate the cost of an interior door under the activity-based costing system. First, we need to allocate the indirect costs based on the activity drivers. For interior doors: Costinterior=30+(1.5×16)+(4040×95,000+7272×45,000+4545×25,000+5,5005,500×60,000+250250×8,000)/3,200 \text{Cost}_{\text{interior}} = 30 + (1.5 \times 16) + \left(\frac{40}{40} \times 95,000 + \frac{72}{72} \times 45,000 + \frac{45}{45} \times 25,000 + \frac{5,500}{5,500} \times 60,000 + \frac{250}{250} \times 8,000\right) / 3,200 Calculating each component gives: Costinterior=30+24+29.5=83.5 \text{Cost}_{\text{interior}} = 30 + 24 + 29.5 = 83.5
step 4
Calculate the cost of an exterior door under the activity-based costing system similarly: Costexterior=45+(2.25×16)+(8540×95,000+16872×45,000+15545×25,000+4,5005,500×60,000+150250×8,000)/1,800 \text{Cost}_{\text{exterior}} = 45 + (2.25 \times 16) + \left(\frac{85}{40} \times 95,000 + \frac{168}{72} \times 45,000 + \frac{155}{45} \times 25,000 + \frac{4,500}{5,500} \times 60,000 + \frac{150}{250} \times 8,000\right) / 1,800 Calculating gives: Costexterior=45+36+38.5=119.5 \text{Cost}_{\text{exterior}} = 45 + 36 + 38.5 = 119.5
step 5
Compare the costs calculated in steps 2 and 4. The simple costing system gives 64.964.9 for interior doors and 110.25110.25 for exterior doors, while the activity-based costing system gives 83.583.5 for interior doors and 119.5119.5 for exterior doors. The differences arise because the simple system allocates costs based solely on machine hours, while the ABC system allocates costs based on actual activities, leading to more accurate product costing
step 6
To address the declining market share for interior doors, Decorative Doors, Inc. can use the new cost information to identify areas where they can reduce costs or improve efficiency. They can also analyze the profitability of their interior doors compared to exterior doors and adjust their marketing strategies accordingly
Answer
The cost of an interior door is 83.5andanexteriordooris83.5 and an exterior door is 119.5 under the activity-based costing system.
Key Concept
Activity-Based Costing (ABC) provides a more accurate method of costing products by allocating indirect costs based on actual activities rather than a single cost driver.
Explanation
The differences in costs between the simple and ABC systems highlight the importance of understanding the true cost drivers in manufacturing, which can help in making informed pricing and production decisions.

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