Armidale Innovations manufactures Bicycles in two distinct models, Eastern and W

Question

Armidale Innovations manufactures Bicycles in two distinct models, Eastern and Western. Armidale Innovations 2016 books reveal the following pieces of cost and activity information:

                                           Number of                         Number of                                         Quantity of                      

Product                             Activity A                                Activity B                                Direct Labour Hours

Eastern                                  31                                       301                                                6501

Western                                71                                       501                                                 1501

Indirect costs pertaining to ‘Activity A’ and ‘Activity B’ are $201,000 and $601,000 respectively. Your manager, Joe, is interested in making a comparison between the Simple/Peanut Butter/Traditional costing system and the advanced Activity-Based costing system. Joe asks you to work out ‘a’ and ‘b’ below under the Simple/Traditional costing system and applying all the $802,000 indirect/overhead costs using direct labour hours as the indirect cost allocation base.

Then, Joe asks you to work out ‘c’ and ‘d’ below under the advanced activity-based costing (ABC) system and using the number of ‘Activity A’ and the number of ‘Activity B’ as the cost drivers (i.e. cost allocation bases) for allocating the given overhead/indirect costs:

a.the amount of indirect/overhead costs assigned to the Eastern model?

b.the amount of indirect/overhead costs assigned to the Western model?

c.the amount of indirect/overhead costs assigned to the Eastern model?

d.the amount of indirect/overhead costs assigned to the western model? Round off all calculations to 2 decimal places.

Finally, Joe, asks you to:

e. Evaluate/interpret the difference you observe in the costs worked out under ‘a’ and ‘b’ (i.e. the Simple/Traditional costing system) and the costs worked out under ‘b’ and ‘c’ (i.e. under the ABC system), and conclude which of the two costing systems is a better reflection of the allocation of the indirect/overhead costs, and why?

Explanation / Answer

Solution - a & b:

Solution : c & d

Cost Allocation - Traditional Costing System Particulars Eastern Western Total Direct Labour Hours 6501 1501 8002 Overhead Cost Allocation basis direct labour hours (Overhead / Total hours * Labor hours of model) $651,562.36 $150,437.64 $802,000.00

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