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Question 1: Activity Based Costing (25 marks)

The Try Corporation has a machining facility specializing in jobs for the aircraft-components market. Try's previous simple job-costing system had two direct-cost categories (direct materials and direct manufacturing labor) and a single indirect-cost pool (manufacturing overhead, allocated using direct manufacturing labor-hours). The indirect cost-allocation rate of the simple system for 2016 would have been $115 per direct manufacturing labor-hour.

Recently a team with members from product design, manufacturing, and accounting used an ABC approach to refine its job-costing system. The two direct-cost categories were retained. The team decided to replace the single indirect-cost pool with five indirect-cost pools. The cost pools represent five activity areas at the plant, each with its own supervisor and budget responsibility. Pertinent data are as follows:

Activity Area

Cost-Allocation Base

Cost-Allocation Rate

Materials handling

Parts

$ 0.40

Lathe work

Lathe turns

0.20

Milling

Machine-hours

20.00

Grinding

Parts

0.80

Testing

Units tested

15.00

Information-gathering technology has advanced to the point at which the data necessary for budgeting in these five activity areas are collected automatically.

Two representative jobs processed under the ABC system at the plant in the most recent period had the following characteristics:

Job 410

Job 411

Direct material cost per job

$ 9,700

$59,900

Direct manufacturing labor cost per job

$750

$11,250

Number of direct manufacturing labor-hours per job

25

375

Parts per job

500

2,000

Lathe turns per job

20,000

59,250

Machine-hours per job

150

1,050

Units per job (all units are tested)

10

200

Required:

1. Compute the manufacturing cost per unit for each job under the previous simple job-costing system.

2. Compute the manufacturing cost per unit for each job under the activity-based costing system.

3. Compare the per-unit cost figures for Jobs 410 and 411 computed in requirements 1 and 2. Why do the simple and the activity-based costing systems differ in the manufacturing cost per unit for each job? Why might these differences be important to Try Corporation?

(3 marks + 6 marks + 16 marks)

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