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Traditional costing system allocate overhead based on a standard unit-based measure that ll products have in common machine hours, processing time or direct labor hours but these allocation measures assume all overhead cost are directly related to units produced. Company uses a standard allocation method for overhead of 400% of direct labor costs. to produce 100000 units of product A requires $35000 of direct material and $80000 of direct labor costs. To produce 3000 units of product B requires $12000 in direct materials and $3750 in direct labor costs. Product A sells for $8 per unit and product B for $14 per unit.

The implementation of an ABC system requires an organization to change its way of analyzing the costing of a product. The people involved must change their focus to what specific overhead activities are involved int he production of the product and the costs of the these activities. ABC links all the costs of activities like order processing, setup, material handling to a product, based on the consumption of that resource by the product.

The activity centers chosen by the team and their associated annual costs were

Activity Per activity Quality $800000 Prod Scheduling $25000 Set-up $800000 Shipping $400000 Shipping Admin $150000 Production $1200000

The cost drivers and their total qantity for each activity center were.

No of Shipment received- Shipping Admin 1000 No of Machine Hours - Production 15000 No of Containers shipped - Shipping 50000 No of setup - Prod scheduling & setup 500 No of pieces scrapped - Quality 8000

The accounting department and Production management of Company analysis the activities for a one year period of all the company

Product A cost Product B Cost Cost Driver Driver Consumption Driver Consumption

No of pieces scrapped 600 200 No of setup 10 12 No of containers shipped 500 18 No of Shipments received 100 24 No of machine hours 600 25

Requirements

1. Prepare a schedule calculating the units cost an grass margin o Product A and B. Using company traditional costing system. 2. Prepare a schedule calculating the unit cost of Product A and B using an activity based costing approach.

3. If company were able to win the bid for Product A, another 100000 units, discuss how this would affect the unit cost of Product A. Assume that no new production equipments is required. Assume the number of containers shipped and machine hours used will increase proportionally with the added production. In Addition, the number of pieces scrapped, Setup - Ups and the number of shipments received will increase by 50%.

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