Question

Your company wants to do a comparison between the current traditional costing system and the newly developed ABC system.   200 units were completed during the month. Associated costs for the month are: Direct material, $21,500; Average direct labor cost, $15/hour; Direct labor hours, 215; Overhead allocation is 175% of direct labor costs.
Complete the cost comparsion between ABC and Traditional Costing for the order. Calculate the Activity Costs per Unit.
Activity	Cost Driver	Activity Amount	Activity Rate
Design	Design Hours	25 hours	$60	per hour
Setup	Number of Setups	6 setups	$40	per setup
Production	Equipment Hours	45 hours	$125	per hour
Assembly	Direct Labor Hours	20 hours	$40	per hour
Shipping/Packaging	Direct Labor Hours	30 hours	$25	per hour
Calculations:	Fill-in the labels and calculations in the table below
Traditional Costing:
Total Cost					Overhead Allocation Rate
ABC Costing
Total Activity Costs for Job
Activity Costs per Unit
ABC Total Costs
Total Activity Costs
Total Cost (ABC)					Overhead Allocation Rate
In 1 -2 paragraphs below, analyze the difference between ABC & Traditional Costing. What potential benefit does this reflect of ABC?

Answer 1

Traditional costing:
Cost of Job:
Direct material				21500
Direct labour (215 hours @15)				3225
OH ($3225*175%)				5644
Total cost				30369
ABC Costing:
Activity cost			Activity	Activity rate	OH
			Incurred
Design			25	60	1500
Setup			6	40	240
Production			45	125	5625
Assembly			20	40	800
Sshipping			30	25	750
		Total Activity cost			8915
		Divide: Number of units			200
		Activity cost per unit			44.575
TOTAL Cost under ABC
Direct material				21500
Direct labour (215 hours @15)				3225
Activtity cost				8915
Total cost under ABC				33640
As analyse from traditional and Activity bassed costing, the traditional costing allocate all the indirect cost with common base irrespective of whether that cost is based on that basis.
However, Under ABC analysis, the processes are converted in to activities and separate allocation base is determined for each activity.
Then the job done is charged on the basis of each activity consumed.
This is very systematic and accurate method of allocation of cost.