Using activity-based costing to make decisions Refer to Exercise E19-19. For 2015, Elton’s managers have decided to use the same indirect manufacturing costs per wheel rim that they computed in 2014. In addition to the unit indirect manufacturing costs, the following data are expected for the company’s standard and deluxe models for 2015:

Because of limited machine-hour capacity, Elton can produce either 2,000 standard rims or 2,000 deluxe rims.

Requirements

1. If Elton’s managers rely on the ABC unit cost data computed in Exercise E19- 19, which model will they produce? Carry each cost to the nearest cent. (Ignore selling and administrative expenses for this calculation.)

2. If the managers rely on the single plant wide allocation rate cost data, which model will they produce?

3. Which course of action will yield more income for Elton?

Exercise E19-19

Computing product costs in traditional and activity-based costing systems Elton Company manufactures wheel rims. The controller expects the following ABC allocation rates for 2014:

Elton produces two wheel rim models: standard and deluxe. Expected data for 2014 are as follows:

The company expects to produce 500 units of each model during the year.

Requirements

1. Compute the total estimated indirect manufacturing cost for 2014.

2. Compute the estimated ABC indirect manufacturing cost per unit of each model. Carry each cost to the nearest cent.

3. Prior to 2014, Elton used a direct labor hour single plant wide allocation rate system. Compute the allocation rate based on direct labor hours for 2014. Use this rate to determine the estimated indirect manufacturing cost per wheel rim for each model, to the nearest cent.