Accounting M3 A2

Cost per set up Is $500

$22 x 8000 = $176,000/ 100 units= $1760

$22 x 600= $13,200/ 10 units= $1320

Job A is 1372.50 Per unit

job B is 2120 per unit

Job A CPU JOB B CPU

1.760 1.320

Job A Job B

Price of units 1275 170

Price of setup 30 200

Shipping cost 15 150

Assembly cost 1200 1600

Total indirect cost 1372.50 2120

Traditional costing systems apply indirect costs to products based on a predetermined overhead rate. Unlike ABC, traditional costing systems treat overhead costs as a single pool of indirect costs. Traditional costing is optimal when indirect costs are low compared to direct costs. There are several steps in the traditional costing process. Activity based costing systems are more accurate than traditional costing systems because they provide a more precise breakdown of indirect costs. However, ABC systems are more complex and more costly to implement. The leap from traditional costing to activity based costing is difficult.

Traditional:

Products Compared Product A Product B Total

1. Units produced & sold 900,000 2,100,000 3,000,000

2. Selling price / unit $3.00 $2.00

3. Direct labor cost / unit $0.50 $0.50

4. Direct materials cost / unit $0.75 $0.50

5. Sales revenues [ = 1 * 2 ] $2,700,000 $4,200,000 $6,900,000

Direct costs

6. Direct labor costs [ = 1 * 3 ] $450,000 $1,050,000 $1,500,000

7. Direct materials costs [ = 1 * 4 ] $675,000 $1,050,000 $1,725,000

8. Total Direct costs [ = 6 + 7 ] $1,125,000 $2,100,000 $3,225,000

Table 2. Sales revenues and direct costs for Products A and B

\

Indirect Components Prod. A & B Indirect % of Total Indirect

Materials purchasing $180,000 12.6%

Machine setups $375,000 26.4%

Product packaging $280,000 19.7%

Machine testing & calibration $300,000 21.1%

Machine maintenance & cleaning $287,000 20.2%

Total Indirect $1,422,500 100.0%

ABC:

Products Compared Product A Product B Total

1. Units...