Question

McKinsey Machines Ltd manufactures a single product A.   It has two cost centers namely molding department and painting department.

Information	Molding Department	Painting Department
Total Manufacturing overheads	$ 1,806,000	$ 2,205,000
Total Machine hours (estimated)	210,000
Total Direct Labour Cost		$ 1,260,000

McKinsey Ltd executes job no. 410.   The cost and output details of Job No.410 are given below:

Information	Molding Department	Painting Department
Direct Materials	$ 1,410	$ 996
Direct Labour	$ 870	$ 2,040
Number of machine hours used in job no. 410	330 hours
Output (units) (expected to be received from Job No. 410)	150 units

Overheads allocation to Job No. 410 will be as follows:

(a) Molding department overheads will be allocated based on machine hours

(b) Painting Department overheads will be allocated using direct labour costs (as a percentage).

Required

(4) Explain why the costs reported under traditional costing and activity-based costing differ from one another?         

Answer 1

McKinsey Machines Ltd
Information	Molding Department	Painting Department
Total Manufacturing overheads	1806000	2205000
Total Machine hours (estimated)	210000
Total Direct Labour Cost		1260000
Cost per machine hour	8.6
Cost per Direct Labour cost		1.75
Job No. 410
	Molding Department	Painting Department	Total Cost
Direct Materials	1410	996
Direct Labour	870	2040
Overhead costs	2838	3570
	5118	6606	11724
Number of units			150
Cost per unit			78.16
(4) Explain why the costs reported under traditional costing and activity-based costing differ from
one another?
Traditional costing overhead costs to products based on an arbitrary average rate.Under ABC
costing indirect costs are to activities then costs are assigned to products based on products usage.
Traditional costing is easy but ABC costing provides more precise breakdown of indirect costs.
Activity based costing systems are more accurate than traditional costing systems