Decorative Doors Ltd produces two types of doors: interior and exterior. The company’s costing system has two direct-cost categories (materials and labour) and one indirect-cost pool. The costing system allocates indirect costs on the basis of machine-hours. 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 is as follows: Particulars Interior Exterior Units sold 3200 1800 Selling price $125 $200 Direct material cost per unit $30 $45 Direct production labour cost per hour5 $16 $16 Direct production labour-hours per unit 1.50 2.25 Production runs 40 85 Material moves 72 168 Machine set-ups 45 155 Machine-hours 5500 4500 Number of inspections 250 150 The owners have heard of other companies in the industry that are now using an ABC system and are curious how an ABC system would affect their product-costing decisions. After analysing the indirect-cost pool for Decorative Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine set-up, assembly, inspection and marketing. Decorative Doors collected the following data related to the indirect-cost activities: Activity Activity cost Activity-cost driver Production scheduling $180 000 Production runs Material handling $45 000 Material moves Machine set-up $25 000 Machine set-ups Assembly $60 000 Machine-hours Inspection $8 000 Number of inspections Marketing costs were determined to be 3% of the sales revenue for each type of door. Calculate the cost of an interior door and an exterior door under the existing costing system. Calculate the cost of an interior door and an exterior door under an activity-based costing system.
Decorative Doors Ltd produces two types of doors: interior and exterior. The company’s costing system has two direct-cost categories (materials and labour) and one indirect-cost pool. The costing system allocates indirect costs on the basis of machine-hours. 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 is as follows:
|
Particulars |
Interior |
Exterior |
|
Units sold |
3200 |
1800 |
|
Selling price |
$125 |
$200 |
|
Direct material cost per unit |
$30 |
$45 |
|
Direct production labour cost per hour5 |
$16 |
$16 |
|
Direct production labour-hours per unit |
1.50 |
2.25 |
|
Production runs |
40 |
85 |
|
Material moves |
72 |
168 |
|
Machine set-ups |
45 |
155 |
|
Machine-hours |
5500 |
4500 |
|
Number of inspections |
250 |
150 |
The owners have heard of other companies in the industry that are now using an ABC system and are curious how an ABC system would affect their product-costing decisions. After analysing the indirect-cost pool for Decorative Doors, the owners identify six activities as generating indirect costs: production scheduling, material handling, machine set-up, assembly, inspection and marketing. Decorative Doors collected the following data related to the indirect-cost activities:
|
Activity |
Activity cost |
Activity-cost driver |
|
Production scheduling |
$180 000 |
Production runs |
|
Material handling |
$45 000 |
Material moves |
|
Machine set-up |
$25 000 |
Machine set-ups |
|
Assembly |
$60 000 |
Machine-hours |
|
Inspection |
$8 000 |
Number of inspections |
Marketing costs were determined to be 3% of the sales revenue for each type of door.
- Calculate the cost of an interior door and an exterior door under the existing costing system.
- Calculate the cost of an interior door and an exterior door under an activity-based costing system.
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