| Prescott, Inc., manufactures bookcases and uses an activity-based costing system. Prescott’s activity areas and related data follows: |
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| Activity | Budgeted Cost of Activity |
Allocation Base | Cost Allocation Rate |
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| Materials handling | $230,000 | Number of parts | $0.50 | |||||||
| Assembly | 3,200,000 | Direct labor hours | 16.00 | |||||||
| Finishing | 180,000 | Number of finished units |
4.50 | |||||||
| Prescott produced two styles of bookcases in October: the standard bookcase and an unfinished bookcase, which has fewer parts and requires no finishing. The totals for quantities, direct materials costs, and other data follow: |
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| Product | Total Units Produced |
Total Direct Materials Costs |
Total Direct Labor Costs |
Total Number of Parts |
Total Assembling Direct Labor Hours |
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| Standard bookcase | 3,000 | $36,000 | $45,000 | 9,000 | 4,500 | |||||
| Unfinished bookcase | 3,500 | 35,000 | 35,000 | 7,000 | 3,500 | |||||
| Requirements: | ||||||||||
| 1. Compute the manufacturing product cost per unit of each type of bookcase. |
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| 2. Suppose that pre-manufacturing activities, such as product design, were assigned to the standard bookcases at $7 each, and to the unfinished bookcases at $2 each. Similar analyses were conducted of post-manufacturing activities such as distribution, marketing, and customer service. The post-manufacturing costs were $22 per standard bookcase and $14 per unfinished bookcase. Compute the full product costs per unit. |
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| 3. Which product costs are reported in the external financial statements? Which costs are used for management decision making? Explain the difference. |
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| 4. What price should Prescott’s managers set for unfinished bookcases to earn $15 per bookcase? |
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