Lloyd and Harry, Inc. is a manufacturer of briefcases. Thecompany produces and sells two products: Leather and Vinyl.Currently, the company uses a traditional costing system toallocate manufacturing overhead to production based on apredetermined manufacturing overhead rate of $100 per machinehour.
Management is considering switching toactivity based costing to improve costing accuracy. In theiranalysis of manufacturing overhead, management has identified twoactivities and cost pools: Product Inspection and Machining. 80% ofthe total budgeted manufacturing overhead relates to the ProductInspection activity. The remainder relates to the Machiningactivity. Product Inspection overhead costs are driven byinspection hours logged. Machining overhead costs are driven bymachine hours logged. All machine hours are logged in the machiningdepartment.
The projected production levels for theupcoming period are 1,000 Leather briefcases and 5,000 Vinylbriefcases. The following activity totals are expected:
| Leather | Vinyl |
Inspection Hours | 900 hours | 1,500 hours |
Machine Hours | 200 hours | 1,000 hours |
- By how much is the traditional costing system over/undercostingthe Leather product line on a per unit basis? (indicatethe amount and if it is over/undercosted)
b. In words, explain how you can use your answer froma. to determine if the Vinyl product line was over/undercosted andto quickly calculate the per unit amount of cost distortion.
