eBook Show Me HowPrint Item Question Content Area Drivers and Product-Costing Accuracy McCourt Company produces two types of leather purses: standard and handcrafted. Both purses use equipment for cutting and stitching. The equipment also has the capability of creating standard designs. The standard purses use only these standard designs. They are all of the same size to accommodate the design features of the equipment. The handcrafted purses can be cut to any size because the designs are created manually. Many of the manually produced designs are in response to specific requests of retailers. The equipment must be specially configured to accommodate the production of a batch of purses that will receive a handcrafted design. McCourt Company assigns overhead using direct labor dollars. Muggs Clark, sales manager, is convinced that the purses are not being costed correctly. To illustrate his point, he decided to focus on the expected annual setup and machine-related costs, which are as follows: Setup equipment $45,000 Depreciation 50,000 * Operating costs 55,000 * Computed on a straight-line basis; book value at the beginning of the year was $250,000. The machine has the capability of supplying 250,000 machine hours over its remaining life. Muggs also collected the expected annual prime costs for each purse, the machine hours, and the expected production (which is the normal output for the company). Standard Purse Handcrafted Purse Direct labor $30,000 $90,000 Direct materials $30,000 $30,000 Units 7,500 7,500 Machine hours 45,000 5,000 Number of setups 100 100 Setup time 1,000 hrs. 500 hrs. Required: 1. Do you think that the direct labor costs and direct materials costs are accurately traced to each type of purse? Yes 2. The controller has suggested that overhead costs be assigned to each product using a plantwide rate based on direct labor dollars. Machine costs and setup costs are overhead costs. Assume that these are the only overhead costs. For
