Thompson products manufactures two products, financial and managerial. The compa

Question

Thompson products manufactures two products, financial and managerial. The company believes that its existing cost system, which allocates manufacturing overhead based on machine hours, may be cross subsidizing the cost of its products. Joel Thompson, CFO and Controller of Thompson products, is considering an activity based costing system. In order to implement activity based costing, Thompson has identified four activities routinely performed in the factory, as well as the total yearly manufacturing overhead costs and cost drivers associated with those activities.

Activity

Manufacturing overhead Costs

Cost Drivers

Material Handling

$4,000

# of parts

Machining

$9,000

# number of machine hours

Assembly

$4,160

# of units produced

Inspection

$3,200

# of units inspected

Thompson's only products are financial and managerial. Total yearly costs, activity levels, and production levels for the two products are as followed:

Financial

Managerial

Direct Material Cost

$5,000

$7,610

Direct Labor Cost

$18,000

$24,000

# parts

1,400

1,800

# machine hours

100

200

# units produced

700

600

# units inspected

600

200

A. List 3 signs that Thompson could have seen to let him know that an ABC system might be more appropiate for his company than a traditional costing system.

Activity

Manufacturing overhead Costs

Cost Drivers

Material Handling

$4,000

# of parts

Machining

$9,000

# number of machine hours

Assembly

$4,160

# of units produced

Inspection

$3,200

# of units inspected

Explanation / Answer

Following are the signs that suggest that Thompson should use Activity based costing:

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