Decorative Doors, Inc., produces two types of doors, interior 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: Interior Exterior Units sold 3,200 1,800 Selling price $ 125 $ 200 Direct material cost per unit $ 30 $ 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 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: Activity Activity Cost Activity Cost Driver Production scheduling $95,000 Production runs Material handling $45,000 Material moves Machine setup $25,000 Machine setups 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. 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?
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
5-26 Activity-based
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:
Interior Exterior
Units sold 3,200 1,800
Selling price $ 125 $ 200
Direct material cost per unit $ 30 $ 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
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:
Activity Activity Cost Activity Cost Driver
Production scheduling $95,000 Production runs
Material handling $45,000 Material moves
Machine setup $25,000 Machine setups
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.
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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