Your company wants to do a comparison between the current traditional costing sy

Question

Your company wants to do a comparison between the current traditional costing system and the newly developed ABC system.   200 units were completed during the month. Associated costs for the month are: Direct material, $21,500; Average direct labor cost, $15/hour; Direct labor hours, 215; Overhead allocation is 175% of direct labor costs. Complete the cost comparsion between ABC and Traditional Costing for the order. Calculate the Activity Costs per Unit. Activity Cost Driver Activity Amount Activity Rate Design Design Hours 25 hours $60 per hour Setup Number of Setups 6 setups $40 per setup Production Equipment Hours 45 hours $125 per hour Assembly Direct Labor Hours 20 hours $40 per hour Shipping/Packaging Direct Labor Hours 30 hours $25 per hour Calculations: Fill-in the labels and calculations in the table below Traditional Costing: Total Cost Overhead Allocation Rate ABC Costing Total Activity Costs for Job Activity Costs per Unit ABC Total Costs Total Activity Costs Total Cost (ABC) Overhead Allocation Rate In 1 -2 paragraphs below, analyze the difference between ABC & Traditional Costing. What potential benefit does this reflect of ABC? Your company wants to do a comparison between the current traditional costing system and the newly developed ABC system.   200 units were completed during the month. Associated costs for the month are: Direct material, $21,500; Average direct labor cost, $15/hour; Direct labor hours, 215; Overhead allocation is 175% of direct labor costs. Complete the cost comparsion between ABC and Traditional Costing for the order. Calculate the Activity Costs per Unit. Activity Cost Driver Activity Amount Activity Rate Design Design Hours 25 hours $60 per hour Setup Number of Setups 6 setups $40 per setup Production Equipment Hours 45 hours $125 per hour Assembly Direct Labor Hours 20 hours $40 per hour Shipping/Packaging Direct Labor Hours 30 hours $25 per hour Calculations: Fill-in the labels and calculations in the table below Traditional Costing: Total Cost Overhead Allocation Rate ABC Costing Total Activity Costs for Job Activity Costs per Unit ABC Total Costs Total Activity Costs Total Cost (ABC) Overhead Allocation Rate In 1 -2 paragraphs below, analyze the difference between ABC & Traditional Costing. What potential benefit does this reflect of ABC?

Explanation / Answer

Traditional costing: Cost of Job: Direct material 21500 Direct labour (215 hours @15) 3225 OH ($3225*175%) 5644 Total cost 30369 ABC Costing: Activity cost Activity Activity rate OH Incurred Design 25 60 1500 Setup 6 40 240 Production 45 125 5625 Assembly 20 40 800 Sshipping 30 25 750 Total Activity cost 8915 Divide: Number of units 200 Activity cost per unit 44.575 TOTAL Cost under ABC Direct material 21500 Direct labour (215 hours @15) 3225 Activtity cost 8915 Total cost under ABC 33640 As analyse from traditional and Activity bassed costing, the traditional costing allocate all the indirect cost with common base irrespective of whether that cost is based on that basis. However, Under ABC analysis, the processes are converted in to activities and separate allocation base is determined for each activity. Then the job done is charged on the basis of each activity consumed. This is very systematic and accurate method of allocation of cost.

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