Managerial Accounting, Activity Based Costing and Traditional Costing System

ABC Corporation makes three types of products and currently uses traditional product costing system.  The management is considering using activity based costing. Below is the details on the tree products

 

Don't use plagiarized sources. Get Your Custom Essay on
Managerial Accounting, Activity Based Costing and Traditional Costing System
Just from $13/Page
Order Essay

 

Products Labor hour per unit Machine hours per unit Material cost per unit  SR Volume of productions

(Units)

Product A 1.5 0.5 20 1,000
Product B 1 1.5 25 5,000
Product C 0.5 1.0 30 1,500

Total manufacturing overhead are SR 750,000. In- depth analysis for overheads has been done to apply activity based costing as follows:

Activities Activity’s Overheads cost pool
Set- ups 150,000
Machinery 200,000
Material handling 125,000
Inspection 275,000
Total 750,000

 

The actual quantity used of activities by products as follows:

Products Set- ups Machinery (hours) Material handling Inspection
Product A 100 500 15 20
Product B 120 7,500 30 150
Product C 300 1,500 90 700
Total 520 9,500 135 870

 

Direct labor rate is SR 5 per hour and overhead allocated to products under traditional costing system using machine hour as allocation base.

Required:

  • Calculate cost per unit per each product under traditional costing system.
  • Calculate cost per unit per each product under activity based costing.
  • Comment on results.

 

 

  1. In 2020, ABC Company produces a single product with the following information: (2.5 marks)
Variable cost per unit: SR
Direct martial PER UNIT 8
Direct labor per unit 10
Manufacturing over head 5
Variable selling expense per units sold 2

 

Additional information: SR
Fixed  manufacturing costs per year 150,000
Fixed  selling and administrating expenses per year 150,000
Number of units produced 20,000
Selling price per unit 50

Required:

  • Prepare income statement using absorption costing and variable costing assuming all 20,000 units sold.
  • Prepare income statement using absorption costing and variable costing assuming all 15,000 units sold and 5,000 units unsold.
  • Comment on results explaining which costing method produces more profit in case of inventory.

Answer:

 

Leave a Reply

Your email address will not be published. Required fields are marked *