Question

Additional information for another product line Assume another product line is also being considered – bookshelves. Only use this information for the questions listed directly below.  Higher skilled workers would be required which will result in paying them $15 per hour.  Additional MOH costs for the year will be $150,000. These costs will be in addition to the costs already being incurred. These costs are due to the additional product line and also related to the current product lines for additional production abilities. The two lines will share all MOH costs.

1. Should the company consider using ABC? Discuss why or why not? Areas to include in the discussion but not limited to the following: impact on product cost, implications of not using the right allocation and its impact on price if any, etc….

2. How specifically would ABC help allocate MOH costs?

Answer 1

(1): Yes, the company should certainly consider using ABC. This is because use of ABC will help the company to better assign the overheads and indirect costs to the new product line of bookshelves. As such ABC costing will ensure that production costs are rightly allocated to the bookshelves line by recognizing the relationship between costs and overhead activities.

By not using the right allocation method there will be implications on the cost and price of the product. It may happen that the costs are either under assigned or over assigned to the new product line if traditional costing method is used instead of ABC method. If this happens then the company will end up incorrectly pricing their bookshelf product. ABC method will ensure that the product is properly priced after all costs are accounted for in a reasonable and rational manner.

(2): ABC will help allocate MOH costs on the basis of activities consumed by the additional product line and the current product lines for additional production abilities. By using the activities of each line as the allocation base it will be ensured that costs are allocated in a scientific manner and not arbitrarily. The activity that is being used as base will be the “cost driver” and the MOH will be regarded as the cost pool total. The total MOH will be divided by the cost driver to determine the cost driver rate and using this rate overhead and indirect cost will be reasonably allocated between the additional product line and the current product lines for additional production abilities.