Carter, Inc. uses a traditional volume-based costing system in which direct labor hours are the allocation base. Carter produces two different products: Product A, which uses 100,000 direct labor hours, and Product B, which uses 300,000 direct labor hours. Carter is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,128,000 across three activities: Design, Production, and Inspection. Under the traditional volume-based costing system, the predetermined overhead rate is $2.82/direct labor hour. Under the ABC system, the cost of each activity and proportion of the activity drivers used by each product are as follows: Total Cost Proportion used by Product A Proportion used by Product B Design (Engineering Hours) $ 208,000 55 % 45 % Production (Direct Labor Hours) $ 700,000 25 % 75 % Inspection (Batches) $ 220,000 50 % 50 % Required: a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system. b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system. c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system. d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system. e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?
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.
Carter, Inc. uses a traditional volume-based costing system in which direct labor hours are the allocation base. Carter produces two different products: Product A, which uses 100,000 direct labor hours, and Product B, which uses 300,000 direct labor hours. Carter is considering switching to an ABC system by splitting its manufacturing
| Total Cost | Proportion used by Product A | Proportion used by Product B | ||||
| Design (Engineering Hours) | $ | 208,000 | 55 | % | 45 | % |
| Production (Direct Labor Hours) | $ | 700,000 | 25 | % | 75 | % |
| Inspection (Batches) | $ | 220,000 | 50 | % | 50 | % |
Required:
a. Calculate the indirect
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system.
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?
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