Prescott, Inc., manufactures bookcases and uses an activity-based costing system.

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P18-27A Product costing in an ABC system [20–30 min]

Prescott, Inc., manufactures bookcases and uses an activity-based costing system.
Prescott’s activity areas and related data follow:

Activity Budgeted cost Allocation base Cost allocation rate
Materials handling 230,000 Number of parts .50
Assembly 3,200,000 Direct labor hours 16.00
Finishing 180,000 Number of finished unit 4.50

Prescott produced two styles of bookcases in October: the standard bookcase and an
unfinished bookcase, which has fewer parts and requires no finishing. The totals for
quantities, direct materials costs, and other data follow:

Requirements

1. Compute the manufacturing product cost per unit of each type of bookcase.

2. Suppose that pre-manufacturing activities, such as product design, were assigned
to the standard bookcases at $7 each, and to the unfinished bookcases at
$2 each. Similar analyses were conducted of post-manufacturing activities such
as distribution, marketing, and customer service. The post-manufacturing costs
were $22 per standard bookcase and $14 per unfinished bookcase. Compute the
full product costs per unit.

3. Which product costs are reported in the external financial statements? Which
costs are used for management decision making? Explain the difference.

4. What price should Prescott’s managers set for unfinished bookcases to earn
$15 per bookcase?