Assume a company produces and sells only two products—14,000 units of Product A and 6,000 units of Product B. The selling prices are $65 per unit for Product A and $96 per unit for Product B. Product A’s direct materials and direct labor costs per unit are $30 and $12, respectively. Product B’s direct materials and direct labor costs per unit are $34 and $15, respectively. The company uses a plantwide overhead rate based on direct labor dollars. It is considering implementing an activity-based costing (ABC) system that allocates all of its manufacturing overhead to three cost pools. The following additional information is available for the company as a whole and for Products A and B: Activity Cost Pool Activity Measure Estimated Overhead Cost Expected Activity Machining Machine-hours $ 300,000 15,000 MH Machine setups Number of setups $ 150,000 200 Setups Product design Number of products $ 80,000 2 Products Activity Measure Product A Product B Machine-hours 9,000 6,000 Number of setups 50 150 Number of products 1 1 When comparing Product B’s total overhead costs using the traditional approach with its total overhead costs using the activity-based approach, which of the following statements is true? Multiple Choice The traditional plantwide approach undercosts Product B by between $50,00 and $100,000 when compared to the activity-based approach. The traditional plantwide approach overcosts Product B by between $50,000 and $100,000 when compared to the activity-based approach. The traditional plantwide approach overcosts Product B by between $0 and $49,999 when compared to the activity-based approach. The traditional plantwide approach undercosts Product B by between $0 and $49,999 when compared to the activity-based approach.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Assume a company produces and sells only two products—14,000 units of Product A and 6,000 units of Product B. The selling prices are $65 per unit for Product A and $96 per unit for Product B. Product A’s direct materials and direct labor costs per unit are $30 and $12, respectively. Product B’s direct materials and direct labor costs per unit are $34 and $15, respectively. The company uses a plantwide
| Activity Cost Pool | Activity Measure | Estimated Overhead Cost | Expected Activity | |
|---|---|---|---|---|
| Machining | Machine-hours | $ 300,000 | 15,000 | MH |
| Machine setups | Number of setups | $ 150,000 | 200 | Setups |
| Product design | Number of products | $ 80,000 | 2 | Products |
| Activity Measure | Product A | Product B |
|---|---|---|
| Machine-hours | 9,000 | 6,000 |
| Number of setups | 50 | 150 |
| Number of products | 1 | 1 |
When comparing Product B’s total overhead costs using the traditional approach with its total overhead costs using the activity-based approach, which of the following statements is true?
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The traditional plantwide approach undercosts Product B by between $50,00 and $100,000 when compared to the activity-based approach.
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The traditional plantwide approach overcosts Product B by between $50,000 and $100,000 when compared to the activity-based approach.
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The traditional plantwide approach overcosts Product B by between $0 and $49,999 when compared to the activity-based approach.
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The traditional plantwide approach undercosts Product B by between $0 and $49,999 when compared to the activity-based approach.
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