A company is considering the adoption of an activity-based costing (ABC) system

Question

A company is considering the adoption of an activity-based costing (ABC) system because the managers suspect that their traditional costing system distorts the product costs. This company produces and sells two products Standard and Deluxe. Their traditional costing system uses machine hours (MHs) as the allocation base for manufacturing overhead cost. The production managers decided that major acivities are Assembly Machine setups, and Parts administration and determined the costs for each activity. They also identified how many MHs, setups, and parts each product requires. Additional information: Standard S120 per unit Deluxe Price Cost Direct materials (DM) Direct labor (DL) S150 per unit S32 per unit $15 per unit $36 per unit S25 per unit Units produced Activity 200,000 units 100,000 units 100,000 MHs Assembly (MHs) Machine setups (setups) Parts administration (part types) 200,000 MHs 100 setups 200 parts 400 setups 200 parts Overhead Cost Assembly Machine setups Parts administration $1,200,000 900,000 S300 2 400,00 0 3 Compared with the unit product cost calculated by the ABC system, what is the distortion (difference) created by the traditional costing system for Deluxe Product? A. Under the traditional costing system, the product is undercosted by S 0.35 per unit. B. Under the traditional costing system, the product is overcosted by 0.35 per unit. Under the traditional costing system, the product is undercosted by 0.70 per unit. Under the traditional costing system, the product is overcosted by S 0.70 per unit. E.None of the above

Explanation / Answer

3. Answer is C

Working:

Traditonal ABC Difference Standard 51.00 50.65 0.35 Deluxe 77.00 77.70 -0.70

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