Chapter 4, Problem 4.24AE

Compare traditional and ABC allocations on a job (Learning Objective 2)

Radley Products has adopted an ABC costing system. The following manufacturing activities, indirect manufacturing costs, and cost drivers have been identified:

Activity	Total estimated MOH costs related to activity	Total estimated amount of allocation base activity
Machine setup	$ 120,000	2,000 setups
Machining	$1,050,000	6,000 machine hours
Polishing	$ 80,000	10,000 polishing cloths
Quality control	$ 280,000	4,000 tests run
Facility-level costs	$ 120,000	50,000 DL hours
Total manufacturing overhead (MOH)	$1,650,000

The Job Cost Record for Job #624 revealed that direct materials requisitioned for the job totaled $1,050. The Job Cost Record also showed that direct labor for this job totaled 10 hours at a wage rate of $25 per hour.

Other data collected on the resources used by Job #624 included:

• machine setup required
• machine hours
• polishing cloths
• quality control tests run

Requirements

1. 1. Calculate the activity cost allocation rate for each of the five pools listed in the table.
2. 2. Calculate the total cost of Job #624 (use an ABC costing system).
3. 3. Why would ABC provide a more accurate allocation of manufacturing overhead (MOH) than a plantwide rate?
4. 4. Assume that Radley Products used a traditional costing system rather than an ABC system. Its plantwide MOH rate would have been determined using direct labor (DL) hours as the allocation base. How much cost distortion would have occurred on this job?