Chapter 4, Problem 4.50BP

Comprehensive ABC (Learning Objectives 2 & 3)

FirstServer Systems specializes in servers for work-group, e-commerce, and enterprise resource planning (ERP) applications. The company’s original job cost system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of $20 per direct labor hour.

A task force headed by FirstServer’s CFO recently designed an ABC system with four activities. The ABC system retains the current system s two direct cost categories. Thus, it budgets only overhead costs for each activity. Pertinent data follow:

Activity	Allocation Base	Cost Allocation Rate
Materials handling	Number of parts	$ 1 10
Machine setup	Number of setups	$ 500.00
Assembling	Assembling hours	$ 80 00
Shipping	Number of shipments	$1,700.00

FirstServer Systems has been awarded two new contracts that will be produced as Job A and Job B. Budget data relating to the contracts follow:

	Job A	Job B
Number of parts	10,000	2,000
Number of setups	20	8
Number of assembling hours	1,000	200
Number of shipments	1	1
Total direct labor hours	9,200	500
Number of output units	100	10
Direct materials cost	$246,000	$46,900
Direct labor cost	$180,000	$18,000

Requirements

1. 1. Compute the product cost per unit for each job using the original costing system (with two direct cost categories and a single overhead allocation rate).
2. 2. Suppose FirstServer Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
3. 3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
4. 4. A dependable company has offered to produce both jobs for FirstServer for $5,600 per output unit. FirstServer may outsource (buy from the outside company) Job A only. Job B only, or both jobs. Which course of action will FirstServer managers take if they base their decision on (a) the original system? (b) ABC system costs? Which course of action will yield more income? Explain.