Laurie Manufacturing Ltd., manufactures two types of Lawn Mowers, Standard and Deluxe. The company uses simple costing system and the two direct cost categories are materials and labor. It also has one indirect cost pool and allocates indirect costs on the basis of machine hours. Information related to the production in the year 2018 is as follows and the owner is concerned about the decline in the market share for the company’s Standard model.
Laurie Manufacturing Ltd.
| Standard | Deluxe | |
| Units sold | 3200 | 1800 |
| 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 are interested in using activity-based costing system and would like to understand how this system would affect their product costing decisions. Mr Samuel, the cost accountant identifies production scheduling, material handling, machine setup, inspection and marketing as six activities generating indirect costs, and collects the following data:
| Activity | Activity Cost | Activity Cost Driver |
| Production scheduling | $95000 | Production runs |
| Material handling | $45,000 | Material moves |
| Machine set up | $25,000 | Machine setups |
| Assembly | $60,000 | Machine-hours |
| Inspection | $8,000 | Number of inspections |
Marketing costs are determined to be 6% of the sales revenue for each type of mower.
REQUIRED:
- Show your calculations in determining the cost of a Standard Lawn Mower and Deluxe Lawn Mower using simple costing system.
- Show your calculations in determining the cost of a Standard Lawn Mower and Deluxe Lawn Mower using ABC system.
- Compare the costs of lawn mowers under simple costing and ABC. Explain to the owner why there is a difference in the use of the two types of costing systems.
- Suggest to the owners of Laurie Manufacturing Ltd., how this new system of ABC could help address the declining market share of Standard Lawn mowers.
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