Silven Company has identified the following overhead activities, costs, and activity drivers for the coming year: Activity Expected Cost Activity Driver Activity Capacity Setting up equipment $126,000 Number of setups 150 Ordering materials 18,000 Number of orders 900 Machining 1,260,000 Machine hours 10,500 Receiving 30,000 Receiving hours 1,250 Silven produces two models of cell phones with the following expected activity demands: Model X Model Y Units completed 5,000 10,000 Number of setups 100 50 Number of orders 300 600 Machine hours 6,000 4,500 Receiving hours 375 875 Required: Determine the total overhead assigned to each product using the four activity drivers. Determine the total overhead assigned to each model using the two most expensive activities. The costs of the two relatively inexpensive activities are allocated to the two expensive activities in proportion to their costs. Using ABC as the benchmark, calculate the percentage error and comment on the accuracy of the reduced system. Explain why this approach may be desirable.
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.
Silven Company has identified the following
| Activity | Expected Cost | Activity Driver | Activity Capacity |
| Setting up equipment | $126,000 | Number of setups | 150 |
| Ordering materials | 18,000 | Number of orders | 900 |
| Machining | 1,260,000 | Machine hours | 10,500 |
| Receiving | 30,000 | Receiving hours | 1,250 |
Silven produces two models of cell phones with the following expected activity demands:
| Model X | Model Y | |
| Units completed | 5,000 | 10,000 |
| Number of setups | 100 | 50 |
| Number of orders | 300 | 600 |
| Machine hours | 6,000 | 4,500 |
| Receiving hours | 375 | 875 |
Required:
- Determine the total overhead assigned to each product using the four activity drivers.
- Determine the total overhead assigned to each model using the two most expensive activities. The costs of the two relatively inexpensive activities are allocated to the two expensive activities in proportion to their costs.
- Using ABC as the benchmark, calculate the percentage error and comment on the accuracy of the reduced system. Explain why this approach may be desirable.
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