a) How much overhead would be assigned to each unit under the traditional allocation method? b) How much overhead would be assigned to each unit under activity-based costing? c) Compared to ABC costing, determine each product’s amount of under- or overapplied overhead
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
A company has traditionally allocated its
|
Estimated Activity |
|||
|
Activity Centre |
Product 1 |
Product 2 |
Estimated Cost |
|
Machine setups |
10 |
15 |
$50,000 |
|
Assembly parts |
1,000 |
1,500 |
75,000 |
|
Packaging units |
500 |
300 |
80,000 |
|
Machine hours per unit |
1 |
1.5 |
|
|
Production volume |
2,000 |
2,000 |
|
Required:
- a) How much overhead would be assigned to each unit under the traditional allocation method?
- b) How much overhead would be assigned to each unit under activity-based costing?
- c) Compared to ABC costing, determine each product’s amount of under- or overapplied overhead.
d) Is ABC suited to service businesses? Explain with appropriate examples.
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