GUAVA

Your company is Guava Company

Your company manufactures two sizes of box springs: twin and double. Presented below is the budget estimates for material cost & labor cost per unit and the budgeted overhead within the activity cost pools.

Production Data

    Twin     Double  
Material Cost per unit     27   38  
Labor Cost per unit     51   61  
Budgeted Production Esti mate   5000   9200  
Activity Cost Pools   Driver   Estimated Ove rhead   Use per Twin   Use per Double
                   
Framing   Square feet of pine           194,400                 4,628                       1,852
Padding   Square feet of quilting           194,500             108,055                    86,445
Filling   Square feet of filling           320,900             501,406                  300,844
Labeling   Number of box es           249,800             832,666                  416,334
Inspection   Number of ins pections           264,700               17,646                       8,824

A)  If the company currently uses a traditional plantwide overhead allocation rate based of 150% of labor cost, calculate the unit cost of the twin and double box springs.

B)   The company is investigating the use of activity-based costing and has created the activity cost pools shown above. Calculate the unit cost of the twin and double box springs using ABC.

Note: The use of ABC or traditional costing does not change the total overhead amount but instead simply changes the way it is allocated.

C)  Analyze the results.  If you believe the ABC numbers are more accurate, discuss the potential impact to pricing of the twin and double if the sales price is determined by the cost.