Question

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

Activity	Budgeted Cost of Activity	Allocation Base	Predetermined Overhead Allocation Rate
Materials handling	\( 230,000	Number of parts	\)1.50
Assembly	3,200,000	Number of assembling direct labor hours	16.00
Finishing	150,000	Number of finished units*	3.00

*Refers to the number of units receiving the finishing activity, not the number of units transferred to Finished Goods Inventory

Martin produced two styles of bookcases in April: 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:

Product	Total Units Produced	Total Direct materials Costs	Total Direct Labor Costs	Total Number of Parts	Total Assembling Direct Labor Hours
Standard bookcase	3,000	\(54,000	\)67,500	9,000	4,500
Unfinished bookcase	3,500	56,000	52,500	7,000	3,500

Requirements

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

Short answer

Manufacturing cost is reported in the external financial statement and differs from the full product cost in terms of the pre and post-manufacturing costs not included in it.

Step-by-step solution

Step-by-Step-SolutionStep 1: Manufacturing cost

Manufacturing cost is related to the all the manufacturing elements such as material, labor, and overhead. It is the cost that affects the external parties’ decisions relating to investment, financing, and pricing.

Manufacturing cost is a part of the cost of goods sold and is reported in the income statement.

Full product cost

Full product cost is the total cost incurred before manufacturing, at the time of manufacturing, and after the manufacturing process. This cost includes all the components that are related to the production decisions.

Some costs included in the full product cost may not be relevant to the external parties but are very important for management.

Full product cost is not reported on the external financial statement but is used in the internal reporting and helps in the management decision making.