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 costs. What is the per-unit cost for desk lamps under a traditional costing system? What is the per-unit cost for desk 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 costs. What is the per-unit cost for desk lamps under a traditional costing system? What is the per-unit cost for desk 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 (DM) and Direct Labor (DL) costs will be the same under both methods, so one calculation will satisfy this requirement under both costing systems. Direct Materials = $0.78 per pound × 1.75 pounds needed per lamp = $1.37. Direct Labor = $2.73 per hour × 1.5 hours needed per lamp = $4.10. For traditional costing, MOH will be calculated by multiplying the DL of $4.10 by 90% = $3.69. To arrive at the per-unit cost, combine DM, DL, and MOH = $9.15 total cost per desk lamp. Under ABC, calculate the cost per key activity: ($22.78 × 8,780 machining hours) + ($3.77 × 1,890 square feet) + ($13.42 × 3,786 hours) = $200,008.40 + $7,125.30 + $50,808.12 = $257,941.82 MOH. Next, calculate MOH per unit by dividing the number of desk lamps produced = $257,941.82/18,980 = $13.59. To arrive at the total cost per desk lamp, combine DM, DL, and MOH = $4.10 + $1.37 + $13.59 = $19.05. This corresponds to Choice A.