Part 6 Activity Based Cost (10 marks)

A company reports the following information about its indirect costs:

1. Total indirect costs of $3,000,000 for the next year. 2. There two products: Product A and Product B. 3. Direct labour hours for Product A is 40,000 and Product B is 60,000 4. The companys accountant has suggested an alternative to the traditional allocation of indirect overhead based on direct labour hours. The accountant suggested the following: a. Indirect costs can be broken down into supervisory wages $500,000, machine set up $250,000, machinery operating costs including depreciation $1,250,000, engineering changes $500,000, quality inspection costs $250,000, shipping costs $250,0000. b. Activity drivers are supervisory wages (direct labour hours), machine set up (2,500 set up hours), machinery operating (12,500 machine hours), engineering changes (2,500 engineering hours), inspection (2,500 inspection hours), shipping (5,000 shipments)

Driver Product A Product B DLH 40,000 60,000 Machine set up 750 1,750 Machine operating 3,500 9.000 Engineering changes 1,000 1,500 Inspections 500 2,000 Shipping Units 1,500 3,500

Questions:

A. Under the traditional allocation method, what is the amount of indirect cost allocated to Product A and Product B? ____________________________________________________________ B. Under the Activity Based Accounting (ACB) method, what is the amount of indirect cost allocated to Product A and Product B? ____________________________________________________________ C. Would the ABC method add value to the company, Yes or No and Why or Why Not? ____________________________________________________________ D. The accountant alternatively suggested a standard costing system for indirect costs. This would be a set / fixed amount for the year for each unit of Product A or Product B shipped. What is the standard cost per unit for Product A and Product B assuming a traditional cost allocation approach? ____________________________________________________________