Problem 1: The job costing system at Fel's Custom Framing has five indirect cost pools (purchasing, materil handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs; Job 215, an order of 15 intricate personalized frames and Job 325, an order of 6 standard personalized frames. The controller wants to compare overhead allocated under the current simple job-costing system and a newly-designed activity-based job costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of activity driver are as follows: Budgeted Quantity of Activity driver Budgeted Overhead Activity Driver Purchasing P 70,000 Purchase orders processed 2,000 Material Handling 87,500 Material moves 5,000 Machine maintenance 237,500 Machine hours 10,500 Product inspection Packaging 1,200 3,800 18,900 Inspections Units produced 39.900 P453,600 Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 325. Job 215 Job 325 Number of purchase orders Number of material moves Machine-hours Number of inspections Units produced 25 8 10 4 40 60 9 3 15 6 REQUIRED: a. Compute the total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine-hours. b. Compute the total overhead allocated to each job under an activity based costing system using the appropriate activity drivers. c. Explain why Smith's Custom Framing might favor the ABC job costing system over the simple job costing system, especially in its bidding process.
Problem 1: The job costing system at Fel's Custom Framing has five indirect cost pools (purchasing, materil handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs; Job 215, an order of 15 intricate personalized frames and Job 325, an order of 6 standard personalized frames. The controller wants to compare overhead allocated under the current simple job-costing system and a newly-designed activity-based job costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of activity driver are as follows: Budgeted Quantity of Activity driver Budgeted Overhead Activity Driver Purchasing P 70,000 Purchase orders processed 2,000 Material Handling 87,500 Material moves 5,000 Machine maintenance 237,500 Machine hours 10,500 Product inspection Packaging 1,200 3,800 18,900 Inspections Units produced 39.900 P453,600 Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 325. Job 215 Job 325 Number of purchase orders Number of material moves Machine-hours Number of inspections Units produced 25 8 10 4 40 60 9 3 15 6 REQUIRED: a. Compute the total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine-hours. b. Compute the total overhead allocated to each job under an activity based costing system using the appropriate activity drivers. c. Explain why Smith's Custom Framing might favor the ABC job costing system over the simple job costing system, especially in its bidding process.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Concept explainers
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.
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Problem 1:
The job costing system at Fel's Custom Framing has five indirect cost pools (purchasing, materil handling,
machine maintenance, product inspection, and packaging). The company is in the process of bidding on two
jobs; Job 215, an order of 15 intricate personalized frames and Job 325, an order of 6 standard personalized
frames. The controller wants to compare overhead allocated under the current simple job-costing system and
a newly-designed activity-based job costing system.
Total budgeted costs in each indirect cost pool and the budgeted quantity of activity driver are as follows:
Budgeted Quantity of
Activity driver
Budgeted Overhead
Activity Driver
Purchasing
P 70,000
Purchase orders processed
2,000
Material Handling
87,500
Material moves
5,000
Machine maintenance
237,500
Machine hours
10,500
Product inspection
Packaging
18,900
39,900
1,200
Inspections
Units produced
3,800
P453,600
Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level costs because it uses
more types of materials that need to be purchased, moved, and inspected relative to Job 325.
Job 215
Job 325
Number of purchase orders
Number of material moves
25
8
10
4
Machine-hours
40
60
Number of inspections
Units produced
9
3
15
6
REQUIRED:
a. Compute the total overhead allocated to each job under a simple costing system, where overhead is
allocated based on machine-hours.
b. Compute the total overhead allocated to each job under an activity based costing system using the
appropriate activity drivers.
c. Explain why Smith's Custom Framing might favor the ABC job costing system over the simple job
costing system, especially in its bidding process.
Problem 2
Hazelnut Company uses activity-based costing. The company produces two products: coats and hats. The
annual production and sales volume of coats is 8,000 units and of hats is 6,000 units. There are three activity
cost pools with the following expected activities and estimated total costs:
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