Question

3. Traditional Product Costing versus Activity Based Costing Ridgeland Inc. makes backpacks for large sporting goods chains that are sold under the customer’s store brand names. The Accounting Department has identified the following overhead costs and cost drivers for next year. Overhead Item Expected Costs Cost Driver Maximum Order Setup costs $489,600 Number of setups 7,200 Ordering costs 130,000 Number of orders 65,000 Maintenance 920,000 Number of machine hours 80,000 Power 88,000 Number of kilowatt hours 440,000 Total predicted direct labor hours for next year is 42,500. The following data are for two recently completed jobs: Job 201 Job 202 Cost of direct materials 10,500 12,000 Cost of direct labor 18,600 62,300 Number of units completed 900 750 Number of direct labor hours 220 270 Number of setups 15 19 Number of orders 21 42 Number of machine hours 450 360 Number of kilowatt hours 200 300

Required:

a. Determine the unit cost for each job using a traditional plantwide overhead rate based on direct labor hours.

b. Determine the unit cost for each job using ABC. Round answer to two decimal places.

c. As a manager of Ridgeland, is there additional information that you would want to help you evaluate the pricing and profitability of Jobs 201 and 202?

d. Assuming the company has been using the method required in part a, how should management react to the findings in part b?

Answer 1

a)	DETERMINE THE OVERHEAD RATE BASED ON DIRECT LABOUR HOURS
	PARTICULARS	AMOUNT ($)	BASIS	DL HOURS	OH RATE
		[A]	[B]	[C]	[D] = {A/C}
	OVERHEAD COST	$1,627,600	Direct Labour Hours	42,500	$38.30
	TOTAL COST	$1,627,600
	DETERMINE THE MANUFACTURING OVERHEAD COST PER UNIT OF EACH PRODUCT
	PRODUCT	DL HOURS	PLANTWIDE OH RATE	TOTAL OH COST	UNITS PRODUCED	OH COST PER UNIT
	JOB 201	220	$38.30	$8,426.00	900	$9.36
	JOB 202	270	$38.30	$10,341.00	750	$13.79
	DETERMINE THE MANUFACTURING COST PER UNIT OF EACH JOB
	PARTICULARS	ABC RATE	JOB 201	JOB 202
	Direct Material Costs			$10,500		$12,000
	Direct Labour Costs			$18,600		$62,300
	Overhead Costs			$8,426		$10,341
	Total Mfg Cost                    [A]	$37,526.00		$84,641.00
	Units                                              [B]	900		750
	Mfg Cost per Unit C = [A/B]	$41.70		$112.85
b)	DETERMINE THE OVERHEAD ACTIVITY COST POOL RATES
	ACTIVITY	ACTIVITY COST POOL	COST DRIVER	QTY OF COST DRIVER	ABC RATE
		[A]	[B]	[C]	[D] = {A/C}
	Set up Costs	$489,600	Number of Setups	7,200	$68.00
	Ordering Costs	$130,000	Number of Orders	65,000	$2.00
	Maintenance	$920,000	No. of Machine Hours	80,000	$11.50
	Power	$88,000	No. of Kilowatt Hours	440,000	$0.20
	TOTAL COST	$1,627,600
	DETERMINE THE MANUFACTURING COST PER UNIT OF EACH JOB
	PARTICULARS	ABC RATE	JOB 201	JOB 202
	Direct Material Costs			$10,500		$12,000
	Direct Labour Costs			$18,600		$62,300
	Overhead Costs:
	Set up Costs	$68.00	15	$1,020.00	19	$1,292.00
	Ordering Costs	$2.00	21	$42.00	42	$84.00
	Maintenance	$11.50	450	$5,175.00	360	$4,140.00
	Power	$0.20	200	$40.00	300	$60.00
	Total Mfg Cost                    [A]	$35,377.00		$79,876.00
	Units                                              [B]	900		750
	Mfg Cost per Unit C = [A/B]	$39.31		$106.50
c)	PARTICULARS	JOB 201	JOB 202
	Traditional Method	$41.70	$112.85
	Activity Cost Based (ABC) Method	$39.31	$106.50
	Difference [Traditional - ABC]	$2.39	$6.35
	Company Profitability increased when Activity Based Costing Method implemented on each Job Because Lower prodcut cost.
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