Problem 15 Yard Works had traditionally allocated overhead at a rate of $4.60 pe
ID: 2444426 • Letter: P
Question
Problem 15 Yard Works had traditionally allocated overhead at a rate of $4.60 per direct labor hour for its production of rakes. Total overhead allocated to each rake was $3.75. The implementation of an ABC system with 4 activity centers generated $3.34 of applied overhead per rake. Show calculations to determine the amount by which rakes are over or undercosted. Circle the amount and label as overcosted or undercosted.
Name the primary negative effect that may result of this specific over or under costing.
Explanation / Answer
Traditional allocation of over heads per Rake 3.75
As per ABC system cost allocation 3.34
The Rake is over coasted by 0.41
The activity based costing (ABC ) assaigning manufacturing over heads more logical manner than traditional approach. It is clear that as per traditional approach the product is over costed by 0.41.
This over coasting will leads t.
1. The product will be over priced and will leaads to decline in sales
2. The product become costlier than similiar product of competitors
3.The over allocation of cost of one product will leads to under costiong of some other products
4. The contribution margin and exact break even point cannot be determined
5. The pricing and marketing policy will be affected
6.It will lerads to wrong reporting and decision making