Question

Moon Systems specializes in servers for​ work-group, e-commerce, and enterprise resource planning​ (ERP) applications. The​ company's original job cost system has two direct cost​ categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of $27 per direct labor hour. A task force headed by Moon​'s CFO recently designed an ABC system with four activities. The ABC system retains the current​ system's two direct cost categories.​ Thus, it budgets only overhead costs for each activity. Pertinent data​ follow:

Activity	Allocation Base	Cost Allocation Rate
Materials handling. . . . . . . . . . . . .	Number of parts		$1.10
Machine setup. . . . . . . . . . . . . . . .	Number of setups		$470.00
Assembling. . . . . . . . . . . . . . . . . .	Assembling hours		$120.00
Shipping. . . . . . . . . . . . . . . . . . . . .	Number of shipments		$1,280.00

Moon Systems has been awarded two new contracts that will be produced as Job A and Job B. Budget data relating to the contracts​ follow:

	Job A	Job B
Number of parts. . . . . . . . . . . . . . . . . . . . . . .	17,000	4,000
Number of setups. . . . . . . . . . . . . . . . . . . . .	6	2
Number of assembling hours. . . . . . . . . . . .	1,700	400
Number of shipments. . . . . . . . . . . . . . . . . .	1	1
Total direct labor hours. . . . . . . . . . . . . . . . .	9,900	880
Number of output units. . . . . . . . . . . . . . . . .	100	20
Direct materials cost. . . . . . . . . . . . . . . . . . .	$195,700	$100,640
Direct labor cost. . . . . . . . . . . . . . . . . . . . . . .	$155,000	$25,000

1.Compute the product cost per unit for each job using the original costing system​ (with two direct cost categories and a single overhead allocation​ rate).

2.Suppose Moon Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.

3.Which costing system more accurately assigns to jobs the costs of the resources consumed to produce​ them? Explain.

4.

A dependable company has offered to produce both jobs for Moon for $6,000 per output unit. Moon may outsource​ (buy from the outside​ company) Job A​ only, Job B​ only, or both jobs. Which course of action will Moon​'s managers take if they base their decision on​ (a) the original​ system? (b) ABC system​ costs? Which course of action will yield more​ income? Explain.

Answer 1

1, CALCULATION OF PRODUCT COST PER UNIT FOR EACH JOB USING ORIGINAL COSTING SYSTEM
PARTICULARS	JOB 1	JOB2
Direct material cost	$ 1,95,700.00	$ 1,00,640.00
Direct labour cost	$ 1,55,000.00	$     25,000.00
Prime cost	$ 3,50,700.00	$ 1,25,640.00
Overhead cost	$ 2,67,300.00	$     23,760.00
( 27*9900,    27*880)
total cost	$ 6,18,000.00	$ 1,49,400.00
Unit produced	100.00	20.00
Cost per unit	$       6,180.00	$       7,470.00

2. CALCULATION OF COST PER UNIT USING ABC SYSTEM
PARTICULARS	JOB 1	JOB2
Direct material cost	$ 1,95,700.00	$            1,00,640.00
Direct labour cost	$ 1,55,000.00	$                25,000.00
Prime cost	$ 3,50,700.00	$            1,25,640.00
Overhead cost	$ 2,26,800.00	$                54,620.00
( as per working below)
total cost	$ 5,77,500.00	$            1,80,260.00
Unit produced	100.00	20.00
Cost per unit	$        5,775.00	$                  9,013.00

working note 1: Allocation of overhead expenses on the basis of identified cost centers
Activity	Cost Centers	cost allocation rate	Job A	Job B
Materials handling	no of parts	$                          1.10	17000	$           18,700.00	4000	$          4,400.00
Machine setup	no of setups	$                      470.00	6	$             2,820.00	2	$             940.00
Assembling	Assembling hours	$                      120.00	1700	$       2,04,000.00	400	$       48,000.00
Shipping	Number of shipments	$                  1,280.00	1	$             1,280.00	1	$          1,280.00
Toal overhead expenses		$       2,26,800.00		$       54,620.00

3ABC Costing more accurately assigns to jobs the costs of the resources consumed to produce​ because ABC costing has the following advantage over traditional costing because under traditional costing the overhead expenditure was assinged on the basis of labour hours but under the abc system they are allocated on the basis of activity performed which accruately reflects the allocation of overhead expenses.

4.Under the traditional costing system decisions whether to accept or not the offer from outsider
Particulars	JOB A	JOB B
cost per unit	$   6,180.00	$        7,470.00
offered price by	$   6,000.00	$        6,000.00
dependable comp
Savings because of	$      180.00	$        1,470.00
offer
since accepting offer will result in saving in both the job therefore Moon may outsource both the jobs
from outside in case of traditional costing

Under the ABC costing system decisions whether to accept or not the offer from outsider
Particulars	JOB A	JOB B
cost per unit	$   5,775.00	$        9,013.00
offered price by	$   6,000.00	$        6,000.00
dependable comp
Savings because of	$     -225.00	$        3,013.00
offer
since accepting offer will result in saving in the jobb but loss in case of job b therefore Moon may outsourcejob b
from outside and continue with production of job a abc costing