Question 1 (Mini Case) (35 marks)
Sunshine Co Ltd produces two types of window frame, aluminiumand wooden. The company’s simple costing system has two direct cost categories (materials and labour) and one indirect cost pool. The simple costing system allocates indirect costs on the basis of machine hours.
Recently, the owners of Sunshine have been concerned about a decline in the market share for aluminium, usually their biggest seller. Information related to Sunshine’s production for the most recent yearfollows:
Aluminium
Wooden
Units sold
3,200
1,800
Selling price
$125
$200
Direct material cost per unit
$30
$45
Direct manufacturing labor cost per hour
$16
$16
Direct manufacturing labourhours per unit
1.50
2.25
Production runs
40
85
Material moves
72
168
Machine setups
45
155
Machine hours
5,500
4,500
Number of inspections
250
150
The owners have heard of other companies in the industry that are now using an activity-based costing system and are curious how an ABC system would affect their product costing decisions. Afteranalyzing the indirect cost pool for Sunshine, six activities wereidentified as
generating indirect costs: production scheduling, material handling,machine setup, assembly, inspection, and marketing. Sunshine collected the following data related to the indirect cost activities:
Activity
Activity Cost
Activity Cost Driver
Production scheduling
$95,000
Production runs
Material handling
$45,000
Material moves
Machine setup
$25,000
Machine setups
Assembly
$60,000
Machine hours
Inspection
$8,000
Number of inspections
Marketing costs were determined to be 3% of the sales revenue for each type of window.
Required:
aCalculate the costofan window and a window underthe existing costing(8
bCalculate the costofan window and a window underan costing(14
c the costs ofthe window in (a) and (b).Explain the and costing differinthe costofanwindow and a window (6
d howSunshine Ltd use the newcostfromits costingto address the decliningshare forinteriordoors. (7
