Lumins, Inc. is a manufacturer of fine quality lamps and currently offers two kinds: floor lamps and desk lamps. Each floor lamp needs 2 direct labor hours and 3 pounds of direct materials while each desk lamp needs 1.5 direct labor hours and 1.75 pounds of direct materials. They currently utilize a traditional costing system, but management has recently established an exploratory committee to investigate whether a switch to Activity-Based Costing (ABC) might be beneficial. Their key activities are as follows: Machining, $22.78 per machining hour; Factory Utilities, $3.77 per square foot; and Supervisor Wages, $13.42 per hour. Lumins has gathered the following information about production and related costs:
Under a traditional costing system, Manufacturing Overhead (MOH) is estimated at 90% of the Direct Labor (DL) cost. What is the per-unit cost for floor lamps under a traditional costing system? What is the per-unit cost for floor lamps under ABC? (Do not round intermediate calculations.)

Question

Lumins, Inc. is a manufacturer of fine quality lamps and currently offers two kinds: floor lamps and desk lamps. Each floor lamp needs 2 direct labor hours and 3 pounds of direct materials while each desk lamp needs 1.5 direct labor hours and 1.75 pounds of direct materials. They currently utilize a traditional costing system, but management has recently established an exploratory committee to investigate whether a switch to Activity-Based Costing (ABC) might be beneficial. Their key activities are as follows: Machining, $22.78 per machining hour; Factory Utilities, $3.77 per square foot; and Supervisor Wages, $13.42 per hour. Lumins has gathered the following information about production and related costs:
 Under a traditional costing system, Manufacturing Overhead (MOH) is estimated at 90% of the Direct Labor (DL) cost. What is the per-unit cost for floor lamps under a traditional costing system? What is the per-unit cost for floor lamps under ABC? (Do not round intermediate calculations.)

Quizplus · Accepted Answer

This question requires several steps before arriving at a per-unit cost for both the traditional costing system and ABC. The Direct Materials and Direct Labor will be the same under both methods, so one calculation will satisfy this requirement for both costing systems. Direct Materials = $0.78 per pound × 3 pounds needed per lamp = $2.34. Direct Labor = $2.73 per hour × 2 hours needed per lamp = $5.46. For traditional costing, MOH will be calculated by multiplying the DL cost of $5.46 by 90% = $4.91. To arrive at the per-unit cost, combine DM, DL, and MOH = $12.71 total cost per floor lamp. Under ABC, calculate the cost per key activity: ($22.78 × 10,400 machining hours) + ($3.77 × 2,770 square feet) + ($13.42 × 4,160 hours) = $236,912.00 + $10,442.90 + $55,827.20 = $303,182.10 MOH. Next, calculate MOH per unit by dividing by the number of floor lamps produced = $303,182.10/12,338 = $24.57. To arrive at the total cost per floor lamp, combine DM, DL, and MOH = $2.34 + $5.46 + $24.57 = $32.37. This corresponds to Choice B.