14 May CALCULATE THE TOTAL COST OF THE ORDER AND THE INVOICE VALUE OF THE ORDER BASED ON TRADITIONAL COSTING SYSTEM.
Alex Erwin started Inter wood, a niche furniture brand, 10 years ago. He ran the business as a sole proprietorship. While he has 50 skilled carpenters and 5 salesmen on his payroll, he has been taking care of the accounting by himself. Now, he intends to offer 40% of the ownership to public in next couple years, and is willing to make changes and has hired you as the management accountant to organize and improve the accounting systems.
Inter wood’s total budgeted manufacturing overheads cost for the current year is $5,404,639 and budgeted total labor hours are 20,000. Alex applied traditional costing method during all of the 10 years period, and based the per-determined overhead rate on total labor hours.
Inter wood’s sofa range includes the 2-set, 3-set and 6-set options. Platinum Interiors recently placed an order for 150 units of the 6-set type. The order is expected to be delivered in 1 month time. Since it is a customized order, Platinum will be billed at cost plus 25%.
You are not a fan of traditional product costing system. You believe that the benefits of activity-based costing system exceeds its costs, so you sat down with Aaron Mason, the chief engineer, to identify the activities which the firm undertakes in its sofa 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
/B (in $)
Production of components
2,313,132
Machine hours
25,000
93
Assembly of components
1,231,312
Number of labor hours
20,000
62
Packaging
213,123
Units
5,000
43
Shipping
231,230
Units
5,000
46
Setup costs
34,243
Number of setups
240
143
Designing
123,132
Designer hours
1,000
123
Product testing
24,234
Testing hours
500
48
Rent
1,234,233
Labor cost
$1,645,644
75%
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:
Order No: 15X2013
Customer: Platinum Interiors
Units: 150
Type: 6 unit
Amounts in $
Cost of direct materials
25,000
Cost of purchased components
35,000
Labor cost
15,600
Activity
Relevant Cost Driver
Activity Usage
Production of components
Machine hours
320
Assembly of components
Number of labor hours
250
Packaging
Units
150
Shipping
Units
150
Setup costs
Number of setups
15
Designing
Designer hours
70
Testing Testing hours
22
Rent
Labor cost
4500
Part A
Calculate the total cost of the order and the invoice value of the order based on traditional costing system.
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