Old Lace (OL) is a well-established manufacturing company that produces vintage furniture. OL has used direct labor hours as the basis for allocating company-wide overhead for many years. However, given recent investments in manufacturing technologies, management feels that ABC costing would perhaps provide a more accurate assessment of the true price of the goods produced.
The following costs have been accumulated and corresponding drivers measured:
Additionally, the following information is available relative to production levels:
In addition to evaluating costs, OL's management wants to evaluate the overall profitability of its customers. Below is an analysis of several of OL's customers, their purchasing habits, and related costs:
Chairs are sold for $310 each, and tables are sold for $1,180 each. The materials required for a chair are $45, and $150 for a table. Direct labor is paid at a rate of $15/hour.
Under the old costing method (using direct labor hours to allocate company-wide overhead), which customer would have been considered the most profitable? Which customer is most profitable under ABC costing?

Question

Old Lace (OL) is a well-established manufacturing company that produces vintage furniture. OL has used direct labor hours as the basis for allocating company-wide overhead for many years. However, given recent investments in manufacturing technologies, management feels that ABC costing would perhaps provide a more accurate assessment of the true price of the goods produced. 
The following costs have been accumulated and corresponding drivers measured:
  Additionally, the following information is available relative to production levels:
  In addition to evaluating costs, OL's management wants to evaluate the overall profitability of its customers. Below is an analysis of several of OL's customers, their purchasing habits, and related costs:
  Chairs are sold for $310 each, and tables are sold for $1,180 each. The materials required for a chair are $45, and $150 for a table. Direct labor is paid at a rate of $15/hour.
Under the old costing method (using direct labor hours to allocate company-wide overhead), which customer would have been considered the most profitable? Which customer is most profitable under ABC costing?

Quizplus · Accepted Answer

The Answer of Old Lace (OL) is a well-established manufacturing company that produces vintage furniture. OL has used direct labor hours as the basis for allocating company-wide overhead for many years. However, given recent investments in manufacturing technologies, management feels that ABC costing would perhaps provide a more accurate assessment of the true price of the goods produced. 
The following costs have been accumulated and corresponding drivers measured:
  Additionally, the following information is available relative to production levels:
  In addition to evaluating costs, OL's management wants to evaluate the overall profitability of its customers. Below is an analysis of several of OL's customers, their purchasing habits, and related costs:
  Chairs are sold for $310 each, and tables are sold for $1,180 each. The materials required for a chair are $45, and $150 for a table. Direct labor is paid at a rate of $15/hour.
Under the old costing method (using direct labor hours to allocate company-wide overhead), which customer would have been considered the most profitable? Which customer is most profitable under ABC costing?

Old Lace (OL) Is a Well-Established Manufacturing Company That Produces