Question

Chess Woods Limited produces two products: wooden chess pieces and wooden inlaid chess boards. Under their traditional cost system using one cost driver (direct manufacturing labor hours), the cost of a set of wooden chess pieces is $325.00. An analysis of the activities and their costs revealed that three cost drivers would be used under a new ABC system. These cost drivers would be equipment usage, storage area for the material, and type of woods used. The new cost of a set of chess pieces was determined to be $298.00 per set. Given this change in the cost structure ________.

Chess pieces are definitely more accurately costed.

Chess will now have a lower sales price.

Chess pieces have benefited from the new system.

The costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system. 5 points

Answer 1

Answer: The costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system

Justification: Activity Based Costing (also known as ABC method) allocates cost to different products or departments based on their actual use or basis some allocation rule basis their level of activity. So, when allocating cost based on the activity level its becomes imperetive that choice of both activity and cost driver is calculated appropriately.

In the given problem, three drivers are determined - Equipment usage, Storage area and type of wood used. So here we need to adequately estimate

--- Equipment usage both products

--- Storage taken both the products

--- Wood consumed by both products

Alongwith with these, we need to consider units produced for wooden chess pieces and wooden inlaid chess boards.

So, accuracy of ABC costing results would depend on the adequacy and quality of the estimated cost drivers and costs used by the system