As a project manager of a manufacturing firm, you are tasked with determining th

Question

As a project manager of a manufacturing firm, you are tasked with determining the total cost for the specific tasks or phases of a larger project. As an example, let’s assume you are responsible for Task 100, Task 125, and Task 150. The three tasks involve heavy use of direct labor hour(s) (DLH), machinery usage, and overhead costs.

Based on the given information: What are the underlying reasons for the variance between traditional costing and activity-based costing for Task 100, Task 125, and Task 150? Explain which costing methodology best depicts the true task cost.

Comment

Task 100 Task 125 Task 150 Budget Project (DLH) 100,000 hours    Machinery Project Budget 45,000 hours Traditional Costing Driven by DLH 900 DLH @ $15 13,500 _ _ 13000 DLH @ $15 _ 19,500 _ 900 hours @ $6.75 Machinery Overhead 6,75 _ _ 1300 hours @ $6.75 Machinery Overhead _ 8,775 _ 1000 DLH @ $15 _ _ 15,000 1000 hours @ $6.75 Machinery Overhead _ _ 6,750 Total Costing (Traditional Costing) $19,575 $28,275 $21,750 Activity-Based Costing-Machine Hours Driven Direct labor hours 13,500 19,500 15,000 533 machine hours @ $15 7,995 _ _ 466 machine hours @ $15 _ 6,995 _ 521 machine hours @ $15 _ _ 7,815 Total Cost (ABC Driven) $21,495 $26,495 $22,815

Explanation / Answer

Major reasons for difference in cost due to costing method of traditional costing and ACC costing is that machinary overheads are allocated on the basis of direct labor hour associated with the task performed by the machine in different task while in ABC machine overheads are allocated on the basis of work done in labor hours in a particular task.

ABC is a better costing technique because there is allocation of overheads on the basis of cost driver which is more concerned with the overhead incurred on the basis of some rational like labor hours, no of inspection etc, while in traditional costing there is uniform or weighted average allocation of overheads in all heads or tasks so ABC do a proper allocation of overheads on the basis of cost deriver associated with the task and not on the basis of average activity.

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