Machine Hours (MH) 4 MH/unit 6 MH/unit
Volumes Produced 50,000 25,000
Orders Served 500 orders 2500 orders
Indirect costs consist of manufacturing costs of $ 900,000 and support costs of $ 900,000.
To determine product line profitability, the current costing system pools all indirect costs (i.e., manufacturing plus support) in one single pool and allocates these costs based on direct labor hours. However, the company is considering adopting a two-stage costing system which would treat the two categories of indirect costs separately. Specifically, the total manufacturing costs (which include material handling ($ 200,000) and processing ($ 700,000)) will be allocated using the sum of direct material and direct labor costs, while the support costs (which include packaging and shipping ($ 325,000) and order handling ($ 575,000)) will be allocated based on the number of orders received.
Required: 1) Determine the per unit cost of each product under the current costing system.
2) Determine the per unit cost of each product under the proposed two-stage system.