These birdhouses are available in three models: mini, deluxe and castle. The deluxe model has been manufactured for the years. The additional models were added to appeal to a broader customer base. Sales of the castle have skyrocketed while the company’s profits have steadily declined. Management has become concerned about the accuracy of its costing system.

These birdhouses are available in three models: mini, deluxe and castle. The deluxe model has been manufactured for the years. The additional models were added to appeal to a broader customer base. Sales of the castle have skyrocketed while the company’s profits have steadily declined. Management has become concerned about the accuracy of its costing system.

Manufacturing overhead is assigned to products on the basis of direct labor hours. For the current year, the company has estimated that it will incur $993,750 in manufacturing overhead cost and produce 2,500 units of the mini, 15,000 of the deluxe and 7,500 units of the castle. Direct material and direct labor cost per units are as follows:

	Model
	Mini	Deluxe	Castle
Direct Materials	$   12.50	$         15	$         20
Direct Labor	$         10	$         20	$         45

 

The mini takes .4 direct labor hours per unit, the deluxe takes .8 direct labor hours per unit, and the castle uses 1.8 labor hours per unit. (Direct labor cost per hour is $25)

Required:

1.      Using a traditional product costing system with one plantwide overhead rate based on direct labor-hours as the basis for assigning manufacturing overhead cost to the products, compute the pre-determined overhead rate. Determine the unit cost of each of the models using the one overhead rate.

2.      Management is considering switching to an activity-based costing (ABC) system to apply manufacturing overhead costs to each model. A review of the manufacturing process has resulted in the following cost pools:

Machining	Number of machine hours	$                              600,000
Assembling	Number of parts	$                              250,000
Packaging	Number of finished units	$                              143,750
Total Overhead Cost		$                              993,750

 

Activity Measure	Model
	Mini	Deluxe	Castle	Total
Machining	100,000	1,000,000	1,400,000	2,500,000
Assembling	1,150	50,000	75,000	126,150
Packaging	2,500	30,000	15,000	47,500

 

3.      Compute the activity rates for each of the three activity cost pools. Using these rates, determine the amount of manufacturing overhead to be applied to each model. Then calculate the cost per unit for each model (material, labor, and manufacturing overhead).

4.      Use your answers from requirements 1-3 to identify factors that may account for the company’s declining profits.

 

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