Carter, Incorporated, produces two products, Product A and Product B. Carter uses a traditional volume-based costing system in which direct labor hours are the allocation base. Carter is considering switching to an ABC system by splitting its manufacturing overhead cost across three activities: Design, Production, and Inspection. The cost of each activity and usage of the cost drivers are as follows: Activity Pool (Driver) Cost of Pool Usage by Product A Usage by Product B Design (engineering hours) $ 300,000 200 300 Production (direct labor hours) 500,000 100,000 300,000 Inspection (batches) 200,000 300 100 Carter manufactures 10,000 units of Product A and 7,500 units of Product B per month. Required: Calculate the predetermined overhead rate under the traditional costing system. Calculate the activity rate for Design. Calculate the activity rate for Machining.
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, Incorporated, produces two products, Product A and Product B. Carter uses a traditional volume-based costing system in which direct labor hours are the allocation base. Carter is considering switching to an ABC system by splitting its manufacturing overhead cost across three activities: Design, Production, and Inspection. The cost of each activity and usage of the cost drivers are as follows:
| Activity Pool (Driver) | Cost of Pool | Usage by Product A | Usage by Product B |
|---|---|---|---|
| Design (engineering hours) | $ 300,000 | 200 | 300 |
| Production (direct labor hours) | 500,000 | 100,000 | 300,000 |
| Inspection (batches) | 200,000 | 300 | 100 |
Carter manufactures 10,000 units of Product A and 7,500 units of Product B per month.
Required:
- Calculate the predetermined overhead rate under the traditional costing system.
- Calculate the activity rate for Design.
- Calculate the activity rate for Machining.
- Calculate the activity rate for Inspection.
- Calculate the indirect
manufacturing costs assigned to each unit of Product A under the traditional costing system. - Calculate the indirect manufacturing costs assigned to each unit of Product B under the traditional costing system.
- Calculate the indirect manufacturing costs assigned to each unit of Product A under the ABC system.
- Calculate the indirect manufacturing costs assigned to each unit of Product B under the ABC system.
- Which product is undercosted and which is overcosted under the volume-based cost system compared to ABC?
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