se ABC to allocate manufacturing overhead (Learning Objective 2) Several years after reengineering its production process, King Corporation hired a new controller, Christine Erickson . She developed an ABC system very similar to the one used by King's chief rival. Part of the reason Erickson developed the ABC system was because King's profits had been declining, even though the company had shifted its product mix toward the product that had appeared most profitable under the old system . Before adopting the new ABC system, the company had used a plantwide overhead rate, based on direct labor hours developed years ago . For the upcoming year, King's budgeted ABC manufacturing overhead allocation rates are as follows : Activity
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.
Use ABC to allocate manufacturing
Several years after reengineering its production process, King Corporation hired a new controller, Christine Erickson . She developed an ABC system very similar to the one used by King's chief rival. Part of the reason Erickson developed the ABC system was because King's profits had been declining, even though the company had shifted its product mix toward the product that had appeared most profitable under the old system . Before adopting the new ABC system, the company had used a plantwide overhead rate, based on direct labor hours developed years ago .
For the upcoming year, King's budgeted ABC manufacturing overhead allocation rates are as follows :
Activity
Materials handling .......................... Machine setup ................................ Insertion of parts ............................ Finishing .........................................
Allocation Base
Number of parts
Number of setups
Number of parts
Finishing direct labor hours
Activity Cost Allocation Rate
$ 4.00 per part $375.00 per setup $ 28.00 per part $ 54.00 per hour
The number of parts is now a feasible allocation base because King recently pur- chased bar-coding technology . King produces two wheel models : Standard and Deluxe . Budgeted data for the upcoming year are as follows:
Parts per wheel ................................................................. . Setups per 1,000 wheels ................................................... . Finishing direct labor hours per wheel .............................. . Total direct labor hours per wheel .................................... .
Standard
8.0 20 .0 2 .0 2.6
Deluxe
10.0 20 .0 3 .5 3.4
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