Problem 5-14A Comparing an ABC system with a traditional costing system LO 5-1,
ID: 2415626 • Letter: P
Question
Problem 5-14A Comparing an ABC system with a traditional costing system LO 5-1, 5-2, 5-3
Richardson Electronics produces video games in three market categories: commercial, home, and miniature. Richardson has traditionally allocated overhead costs to the three products using the companywide allocation base of direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers.
Category Total Pooled Cost Types of Costs Cost Driver
Unit $ 697,000 Indirect labor wages, supplies, factory utilities, machine maintenance Machine hours
Batch 366,100 Materials handling, inventory storage, labor for setups, packaging,
labeling and shipping, scheduling Number of production orders
Product 211,300 Research and development Time spent by research department
Facility 510,400 Rent, general utilities, maintenance, facility depreciation, admin. salaries Square footage
Additional data for each of the product lines follow.
Commercial Home Miniature Total
Direct materials cost $ 36.50 /unit $ 24.80 /unit $ 30.50 /unit —
Direct labor cost $ 14.70 /hour $ 14.70 /hour $ 18.40 /hour —
Number of labor hours 5,300 11,800 1,300 18,400
Number of machine hours 18,000 48,000 16,000 82,000
Number of production orders 280 2,200 320 2,800
Research and development time 12 % 23 % 65 % 100 %
Number of units 16,000 46,000 15,000 77,000
Square footage 19,000 46,000 23,000 88,000
Required: a. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines. (Round "Cost per unit" to 2 decimal places.)
Type of product Total Cost Cost per Unit
commercial
home
miniature
combined total
b. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines. (Round intermediate calculations and "Cost per unit" answers to 2 decimal places. Round "Total cost" to the nearest dollar amount.)
Type of product Total Cost Cost per Unit
commercial
home
miniature
combined total
Explanation / Answer
a.
Total cost and cost per unit is calculated as under:
Under a traditional volume based product costing system, Cost of each product is calculated as the sum of actual direct material cost, actual direct-labour cost, and applied manufacturing overhead.
Overhead is applied on the basis of predetermined rate which is calculated using the direct labour hours.
Predetermined Overhead rate is computed as under:
Predetermined Overhead Rate = Budgeted Manufacturing overhead Cost/ Budgeted amount of cost driver
= $1,784,800/18,400= 97 per direct labour hour
Cost driver used in traditional volume based costing system is the direct labour hours.
b.
Product Costs as per activity based costing is calculated as under:
Manufacturing overhead is allocated for each activity on the basis of cost driver selected for each activity.
Commercial Home Miniature No. of units 16,000 46,000 15,000 Direct labour hour 5,300 11,800 1,300 Direct Material $36.50 $24.80 $30.50 Direct Labor $14.70 $14.70 $18.40 Total Direct Costs per unit $51.20 $39.50 $48.90 Total direct Cost $819,200 $1,817,000 $733,500 Manufacturing Overhead (Traditional Costing) $514,100 $1,144,600 $126,100 Total Product Cost per unit $83.33 $64.38 $57.31 Total cost $1,333,300 $2,961,600 $859,600