Calculate the total cost of the order and the invoice value of the order based on traditional costing system.

Alex Erwin started Inter wood, a niche furniture brand, 10 years ago. He ran the business as a sole proprietorship. While he has 50 skilled carpenters and 5 salesmen on his payroll, he has been taking care of the accounting by himself. Now, he intends to offer 40% of the ownership to public in next couple years, and is willing to make changes and has hired you as the management accountant to organize and improve the accounting systems.

Inter wood’s total budgeted manufacturing overheads cost for the current year is $5,404,639 and budgeted total labor hours are 20,000. Alex applied traditional costing method during all of the 10 years period, and based the per-determined overhead rate on total labor hours.

Inter wood’s sofa range includes the 2-set, 3-set and 6-set options. Platinum Interiors recently placed an order for 150 units of the 6-set type. The order is expected to be delivered in 1 month time. Since it is a customized order, Platinum will be billed at cost plus 25%.

You are not a fan of traditional product costing system. You believe that the benefits of activity-based costing system exceeds its costs, so you sat down with Aaron Mason, the chief engineer, to identify the activities which the firm undertakes in its sofa division. Next, you calculated the total cost that goes into each activity, identified the cost driver that is most relevant to each activity and calculated the activity rate. The results are summarized below:

Activity

A (in $)

Relevant Cost Driver

B

/B (in $)

Production of components

2,313,132

Machine hours

25,000

93

Assembly of components

1,231,312

Number of labor hours

20,000

62

Packaging

213,123

Units

5,000

43

Shipping

231,230

Units

5,000

46

Setup costs

34,243

Number of setups

240

143

Designing

123,132

Designer hours

1,000

123

Product testing

24,234

Testing hours

500

48

Rent

1,234,233

Labor cost

$1,645,644

75%

Once the order was ready for packaging, Aaron gave you a summary of total cost incurred and a statement of activities performed (also called the bill of activities) as shown below:

Order No: 15X2013
Customer: Platinum Interiors
Units: 150
Type: 6 unit
Amounts in $

Cost of direct materials

25,000

Cost of purchased components

35,000

Labor cost

15,600

Activity

Relevant Cost Driver

Activity Usage

Production of components

Machine hours

320

Assembly of components

Number of labor hours

250

Packaging

Units

150

Shipping

Units

150

Setup costs

Number of setups

15

Designing

Designer hours

70

Testing Testing hours

22

Rent

Labor cost

4500

Part A

Calculate the total cost of the order and the invoice value of the order based on traditional costing system.

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