Part A:

Button Pty Ltd manufactures two types of children’s beds. The two products are Serta and Tempur. Button company, who currently use a conventional costing system, applies manufacturing overhead to all units at the rate of $90 per machine hour. Production information is as follows:

The management accountant at Button company has determined that the firm’s overhead can be classified into three main activities: manufacturing machine setups, machine processing and product shipping. Information on the three cost drivers respectively is as follows:

Button Ltd has total overhead of $6,300,000 and has been categorised as follows: 

Required:

1. Calculate the unit manufacturing cost of the Serta and the Tempu beds using the company’s current overhead costing procedures.

2. Calculate the unit manufacturing cost of the Serta and the Tempu using activity-based costing. Show your calculations using a simple Excel spreadsheet.

3. Is the cost of the Tempu bed distorted by the use of machine hours to allocate total manufacturing overhead to production, and, if so by how much per unit?

4. Assume that the current selling price of the Tempu bed is $280 and the marketing director has proposed to offer a $30 discount to increase sales. Is the discount advisable? Advise management. Show supporting calculations.

5. ‘Conventional costing will always distort product costs.’ Discuss the validity of this statement.