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Drilling Innovations Inc. produces specialized cutting heads used by companies that drill for oil and natural gas. The company recently implemented an ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for all of its products. To perform this evaluation the company has compiled data for the three products using both the traditional system and the new ABC system. The traditional system uses a single driver (machine hours). The ABC system uses a variety of cost drivers related to the activities used Page 248 to produce the cutting heads. The three products involved

Drilling Innovations Inc. produces specialized cutting heads used by companies that drill for oil and natural gas. The company recently implemented an ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for all of its products. To perform this evaluation the company has compiled data for the three products using both the traditional system and the new ABC system. The traditional system uses a single driver (machine hours). The ABC system uses a variety of cost drivers related to the activities used Page 248 to produce the cutting heads. The three products involved

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Provide a possible explanation as to why the cost of OS-367 increased under the ABC system while the cost GS-157 decreased.
ATC 5-1 Business Applications Case Using ABC to improve product costing Drilling Innovations Inc. produces specialized cutting heads used by companies that drill for oil and natural gas. The company recently implemented an ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for all of its products. To perform this evaluation the company has compiled data for the three products using both the traditional system and the new ABC system. The traditional system uses a single driver (machine hours). The ABC system uses a variety of cost drivers related to the activities used Page 248 to produce the cutting heads. The three products involved in the trial run of the ABC system were GS-157, HS-241, and OS- 367. The following data relate to these products. Product GS-157 HS-241 OS-367 Totals Selling Price per Unit $19.30 17.50 15.10 Units Produced 120,000 90,000 40,000 Total Costs Allocated: Traditional Costing $1,600,000 1,100,000 400,000 $3,100,000 Cost per Unit: Traditional Costing $13.3333 12.2222 10.0000 Total Cost Allocated: ABC Cost per Unit ABC $1,500,000 $12.5000 1,050,000 11.6667 550,000 13.7500 $3,100,000
Transcribed Image Text:ATC 5-1 Business Applications Case Using ABC to improve product costing Drilling Innovations Inc. produces specialized cutting heads used by companies that drill for oil and natural gas. The company recently implemented an ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for all of its products. To perform this evaluation the company has compiled data for the three products using both the traditional system and the new ABC system. The traditional system uses a single driver (machine hours). The ABC system uses a variety of cost drivers related to the activities used Page 248 to produce the cutting heads. The three products involved in the trial run of the ABC system were GS-157, HS-241, and OS- 367. The following data relate to these products. Product GS-157 HS-241 OS-367 Totals Selling Price per Unit $19.30 17.50 15.10 Units Produced 120,000 90,000 40,000 Total Costs Allocated: Traditional Costing $1,600,000 1,100,000 400,000 $3,100,000 Cost per Unit: Traditional Costing $13.3333 12.2222 10.0000 Total Cost Allocated: ABC Cost per Unit ABC $1,500,000 $12.5000 1,050,000 11.6667 550,000 13.7500 $3,100,000
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