Accounting

Product cost distortions with traditional costing, original activity-based costing analysisThe Manhattan Company manufactures two models of compact disc players: a deluxe model and a regular model. The company has manufactured the regular model for years; the deluxe model was introduced recently to tap a new segment of the market. Since the introduction of the deluxe model, the company’s profits have steadily declined, and management has become increasingly concerned about the accuracy of its costing system. Sales of the deluxe model have been increasing rapidly.

The current cost accounting system allocates manufacturing support costs to the two products on the basis of direct labor hours. The company has estimated that this year it will incur $1 million in manufacturing support costs and will produce 5,000 units of the deluxe model and 40,000 units of the regular model. The deluxe model requires 2 hours of direct labor, and the regular model requires 1 hour. Material and labor costs per unit and selling price per unit are as follows:

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ITEM DELUXE REGULAR
Direct materials cost $45 $30
Direct labor cost 20 10
Selling price 140 80

Required

(a) Compute the manufacturing support cost driver rate for this year.

(b) Determine the cost to manufacture one unit of each model.

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