Activity-based costing versus traditional overhead allocation methodsWoodland Industries manufactures and sells custom-made windows. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning three manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $15 per hour and that there were no beginning inventories. The following information was available for 2013, based on an expected production level of 50,000 units for the year, which will require 200,000 direct labor hours:Activity Budgeted Cost Driver Used Cost(Cost Driver) Costs for 2013 as Allocation Base Allocation RateMaterials handling $ 250,000 Number of parts used $ 0.20 per partCutting and lathe work 1,750,000 Number of parts used 1.40 per partAssembly and inspection 4,000,000 Direct labor hours 20.00 per hourThe following production, costs, and activities occurred during the month of July:Units Direct Number DirectProduced Materials Costs of Parts Used Labor Hours3,200 $107,200 70,400 13,120Required:a. Calculate the total manufacturing costs and the cost per unit of the windowsproduced during the month of July (using the activity-based costing approach).b. Assume instead that Woodland Industries applies manufacturing overhead on a direct labor hours basis (rather than using the activity-based costing system previously described). Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of July. (Hint: You will need to calculate the predetermined overhead application rate using the total budgetedoverhead costs for 2013.)c. Compare the per unit cost figures calculated in parts a and b . Which approach do you think provides better information for manufacturing managers? Explain your answer.
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.
Activity-based costing versus traditional
Woodland Industries manufactures and sells custom-made windows. Its
Activity Budgeted Cost Driver Used Cost
(Cost Driver) Costs for 2013 as Allocation Base Allocation Rate
Materials handling $ 250,000 Number of parts used $ 0.20 per part
Cutting and lathe work 1,750,000 Number of parts used 1.40 per part
Assembly and inspection 4,000,000 Direct labor hours 20.00 per hour
The following production, costs, and activities occurred during the month of July:
Units Direct Number Direct
Produced Materials Costs of Parts Used Labor Hours
3,200 $107,200 70,400 13,120
Required:
a. Calculate the total
produced during the month of July (using the activity-based costing approach).
b. Assume instead that Woodland Industries applies manufacturing overhead on a direct labor hours basis (rather than using the activity-based costing system previously described). Calculate the total manufacturing cost and the cost per unit of the windows produced during the month of July. (Hint: You will need to calculate the predetermined overhead application rate using the total budgetedoverhead costs for 2013.)
c. Compare the per unit cost figures calculated in parts a and b . Which approach do you think provides better information for manufacturing managers? Explain your answer.
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