Question

Electronic Inc (EI) produces three types of circuit boards, A, B and C for the Computer Manufacturers and after sales maintenance industries. The cost system used by EI until 2013 was classified as the traditional where all cost except direct material and direct labour were allocated to each board based on the direct labour hours used to produce them, (i.e direct labour was the cost driver). The new Management accountant undertook a cost study to improve the costing and pricing of the boards and it was determined that they were six clearly identifiable cost pools which could be used to implement an ABC costing system.

The following table details the budgeted information for the year 2015. Total Indirect Production cost for the year is budgeted to be $ 13,646,500.

	Board A	Board B	Board C	Total Cost
Units to be	100,000	8,000	50,000
produced
Direct material	$66 per unit	$88 per unit	$45 per unit	$ 9,554,000
Direct labor	4 hrs per unit	18 hrs per unit	9 hrs per unit	$ 13,916,000

The cost pools, their drivers and costs are listed in the table below based on the cost study performed by the Management Accountant.

Activity cost	Cost driver	Estimated	Expected	Expected	Expected
pools		overhead cost	activity	activity	activity
			Board A	Board B	Board C
Machining Cost	Machine hours	9,360,000	7 MHR per	15 MHR per	9 MHR
	(MHR)		unit	unit	per unit
Material	Kilograms of	1.296,000	3 kg per unit	4 kg per unit	2 kg per
Handling	material handled				unit
Production set	Number of set ups	1,600,000	1,000	500	500
ups
Production	Number of	250,500	3,000	2,000	700
orders	production orders
Shipping Cost	Number of orders	1,140,000	693	907
	shipped
		$ 13,652,500

The selling price for the product is calculated at 140% of manufacturing cost.

Required:

1. Compute the predetermined overhead rates under the traditional costing system and determine the total production cost for each product as well as the expected selling price.
2. Compute the ABC overhead cost for each product and determine the total production cost for each product and the expected selling price.
3. Discuss the effect to the organization of changing the costing method.

Answer 1