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Mr. Bob is running a furniture brand ClassicWoods for last 8 years.  Now with the growing business, he wants to make improvements in the accounting system which he used to do himself and hires John for the purpose.

The total budgeted manufacturing overheads cost for running year is $4,434,211 (5,404,639) & total labour hours are 15,000.

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There are two kinds of Cupboard manufactured by ClassicWoods, A-type with premium wood and 5 sections and B-type with normal quality & 3 sections. Modern Décor recently placed an order for 100 (150) units of the A-type cupboard. The order is expected to be delivered in 2 months. (Since it is a customized order, Platinum will be billed at cost plus 25%.)

You sat down with the chief engineer to identify the activities which the firm undertakes in its cupboard division. Next, you calculated the total cost that goes into each activity, identified the cost driver that is most relevant to each activity and calculated the activity rate. The results are summarized below:

Activity

A (in $)

Relevant Cost Driver

B

C=A/B (in $)

Production of components

1,50,444(2,313,132)

Machine hours

20,000

7.52

Assembly of components

920,000(1,231,312)

Number of labor hours

15,000

61.33

Packaging

178,254(213,123)

Units

3,500

51

Shipping

185,788(231,230)

Units

3,500

53

Setup costs

27,868(34,243

Number of setups

190

146.67

Designing

99,498(123,132

Designer hours

910

109.34

Product testing

18,110(24,234

Testing hours

400

45.28

Rent

985,372(1,234,233

Labor cost

$640,491

65%

Once the order was ready for packaging, Aaron gave you a summary of total cost incurred and a statement of activities performed (also called the bill of activities) as shown below:

Customer: Modern Décor Units: 100(150Amounts in $

Cost of direct materials

20,000

Cost of purchased components

30,000

Labor cost

12,800

 

Activity

Relevant Cost Driver

Activity Usage

Production of components

Machine hours

300

Assembly of components

Number of labor hours

210

Packaging

Units

120

Shipping

Units

120

Setup costs

Number of setups

15

Designing

Designer hours

55

Testing

Testing hours

18

Rent

Labor cost

4100

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