Accountants for Dylan Co. used traditional and ABC costing methods to calculate

Question

Accountants for Dylan Co. used traditional and ABC costing methods to calculate unit costs for two of the company’s products: Zippo and Zappo. The information they accumulated is presented below:

Which costing method, Traditional or ABC produces the more accurate results? . Based on your response, which product appears to be overpriced?  .

Traditional Costing ABC Costing ZIPPO ZAPPO ZIPPO ZAPPO Units Produced 5,000 20,000 5,000 20,000 Cost PER UNIT:    Direct Materials $35 $25 $35 $25    Direct Labor $15 $15 $15 $15    Overhead $40 $40 $93 $27      Total Cost Per Unit $90 $80 $143 $67

Explanation / Answer

Traditional costing assigns overehads to products based on an arbitary average rate whereas activity based costing assigns overheads to actvities and then to products based on activity rates. It is a far more complex and refined method of costing. However, since the allocation of ovrerheads is more accurate, it produces more accurate results.

Zappo appears to be overpriced as according to the ABC method the overhead is $27 whereas according to the traditional system the ovehead is $40. Thus, the product is overpriced by $13.

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