36 Compare and Contrast Traditional and Activity-Based Costing Systems

Calculating precise manufacturing price for every product is a an important piece of info for a that company decision-making. For example, discovering the cost to create a unit the product affects no only exactly how a service budgets come manufacture the product, however it is often the starting point in determining the sales price.

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An crucial component in identify the complete production prices of a product or project is the ideal allocation of overhead. For some companies, the frequently less-complicated traditional an approach does terrific job of allocating overhead. However, for countless products, the allocation the overhead is a more complicated issue, and an activity-based costing (ABC) system is more appropriate.

Another variable to think about in identify which of the two significant overhead allocation techniques to use is the cost linked with collecting and evaluating information. When making their decision regarding which an approach to use, the company must take into consideration these costs, both in time and money. (Figure) to compare overhead in the 2 systems. In many cases, the ABC technique is an ext expensive in regards to time and other costs.

The difference in between the traditional method (using one cost driver) and also the ABC an approach (using multiple cost drivers) is more complicated than simply the number of cost drivers. When direct labor is a big portion the the product cost, the overhead prices tend to be consistently propelled by one cost driver, i m sorry is commonly direct job or machine hours; the traditional method appropriately allocates those costs. When an innovation is a big portion the the product cost, the overhead prices tend to be propelled by many drivers, so using multiple cost drivers in the ABC technique allows for a more precise allocation that overhead.

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Overhead in traditional versus abc Costing TraditionalABC
Overhead assignedSingle expense driverMultiple cost drivers
Optimal usageWhen direct labor is a big portion the the product costWhen modern technology is a big portion the the product cost
OrientationCost drivenProcess driven

As displayed with Musicality’s products, not just are there different expenses for every product when comparing classic allocation v an activity-based costing, however ABC verified that the Solo product creates a loss for the company. Activity-based costing is a more accurate method, because it assigns overhead based on the tasks that drive the overhead costs. It deserve to be concluded, then, that the cost and also subsequent pistol loss because that each unit’s sales administer a an ext accurate photo than the in its entirety cost and gross profit under the timeless method. (Figure) to compare the expense per unit making use of the different expense systems and shows how various the prices can be depending on the technique used.

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How much overhead would be allocated to each unit under the classic allocation method?How much overhead would be allocated to every unit under activity-based costing?

(Figure)Carlton’s Kitchens provides two types of pasta makers: Strands and Shapes. The company expects come manufacture 70,000 systems of Strands, which has a per-unit direct material cost of $10 and also a per-unit straight labor cost of $60. It additionally expects to manufacture 30,000 systems of Shapes, which has actually a per-unit material cost of $15 and a per-unit direct labor price of $40. The is estimated that Strands will use 140,000 machine hours and Shapes will require 60,000 an equipment hours. Historically, the company has offered the classic allocation method and applied overhead at a price of $21 per maker hour. That was determined that there were three price pools, and the overhead for each cost pool is shown:

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What is the per-unit price for each product under the traditional allocation method?What is the per-unit cost for every product under alphabet costing?Compared to abc costing, was each product’s overhead under- or overapplied?How lot was overhead under- or overapplied for each product?

(Figure)Carlton’s Kitchen’s three cost pools and also overhead approximates are together follows:

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The estimated overhead because that the material cost pool is approximated as $12,500, and also the estimate for the machine setup pool is $35,000. Calculate the allocation rate per unit of brass and per unit of gold using:

The timeless allocation methodThe activity-based costing method

(Figure)Portable Seats renders two chairs: folding and wooden. This info was derived to review the decision to think about ABC:

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How lot overhead would be assigned to each unit under the traditional allocation method?How much overhead would be assigned to every unit under activity-based costing?

(Figure)Casey’s Kitchens provides two varieties of food smokers: Gas and Electric. The firm expects come manufacture 20,000 devices of Gas smokers, which have actually a per-unit straight material price of $15 and a per-unit direct labor cost of $25. It additionally expects come manufacture 50,000 systems of electrical smokers, which have a per-unit material cost of $20 and a per-unit direct labor expense of $45. Historically, it has actually used the timeless allocation method and applied overhead in ~ a rate of $125 per machine hour. That was figured out that there to be three price pools, and also the overhead because that each cost pool is together follows:

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What is the per-unit price for every product under the classic allocation method?What is the per-unit cost for every product under alphabet costing?

(Figure)Casey’s Kitchens’ three cost pools and also overhead approximates are as follows:

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The estimated overhead because that the material cost pool is estimated as $45,000, and the estimate for the device setup pool is $55,000. Calculation the allocation rate per unit the silver and also per unit of yellow using:

The traditional allocation methodThe activity-based costing method

(Figure)Portable Seats provides two chairs: folding and also wooden. This information was derived to testimonial the decision to think about ABC:

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Compute the overhead assigned to each product under:

The timeless allocation methodThe activity-based costing method

(Figure)Cape ko Adventures provides foam noodles with sales of 3,000,000 systems per year and retractable boat oars with sales that 50,000 pairs every year. What info would Cape cod Adventures require in bespeak to readjust from classic to abc costing? What are the constraints to activity-based costing?