Nasir Manufacturing produces two products in its Sharjah plant: Crystal and Glass

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Nasir Manufacturing produces two products in its Sharjah plant: Crystal and Glass. Since inception, Nasir has used only one manufacturing overhead pool to accumulate costs. Manufacturing overhead has been allocated to products based on direct labor hours.

Until recently, Nasir was the sole producer of Glass and was able to dictate the selling price. However, last year Zayed Products began marketing a comparable product at a price below the standards costs developed by Nasir. Market share has declined rapidly, and Nasir must decide whether to meet the competitive price or to discontinue the product line. Recognizing that discontinuing the product line would place additional burden on its remaining product, Crystal.

Nasir is planning to use the activity-based costing (ABC) to determine if it would show a different cost structure for the two products.

The three major indirect costs for manufacturing the products are purchase orders, power usage and setup costs and handling materials. A decision was made to separate the manufacturing department costs into three activity centers: 1) Inspection using number of purchase orders as the cost driver, 2) Fabricating using machine hours as the cost driver and 3) Assembly using number of setups as the cost driver.

The annual budget before separation of manufacturing overhead is shown below in the table:

	Total Cost	Product line
		Crystal	Class
Number of units		60,000	80,000
Direct labor		3 hours/unit	4 hours/unit
Number of direct labor hours	240,000 hours
Total Direct Labor	AED 870,000
Direct Material		AED 7/unit	AED 8/unit
Manufacturing Overhead	AED   660,000

The cost structure after separation of overhead into activity pools is shown below:

	Inspection	Fabricating	Assembly
Direct Labor	25%	35%	40%
Direct Material	20%	30%	50%
Manufacturing overhead	35%	25%	40%

The activity base rates for the products are shown below:

Activity Base	Crystal	Glass
Number of Purchase Orders	5,000	6,000
Machine hours per unit	6	8.76
Number of setups	7,000	9,000

Questions:

1. By allocating the manufacturing overhead based on direct labor hours, calculate the:

1. Total manufacturing budgeted cost of the manufacturing department 
2. Cost per unit for Crystal product 
3. Cost per unit for Class product 

2. Using ABC system , calculate the cost per unit for:

1. Crystal
2. Glass 

3. Discuss how a decision by Nasir Manufacturing regarding the continued production of Crystal will be affected by the results of your calculations in requirement C.