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Costing Methods: Traditional vs. Activity-Based

Wichita Company is considering switching from a traditional costing method to activity-based costing. It gathered budgeted production costs and overhead activities. Job orders 212 and 214 were completed with specific manufacturing costs and overhead activities. Calculations are required to determine the overhead and unit costs under each method. Missouri Company currently uses a normal cost system to allocate overhead based on direct labor hours. It is considering adopting activity-based costing. Calculations are required to determine the unit costs of Hardware X and Accessory Y under the current method and activity-based costing using estimated production volumes, direct costs, budgeted overhead, and estimated overhead activities for each product.

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171 views2 pages

Costing Methods: Traditional vs. Activity-Based

Wichita Company is considering switching from a traditional costing method to activity-based costing. It gathered budgeted production costs and overhead activities. Job orders 212 and 214 were completed with specific manufacturing costs and overhead activities. Calculations are required to determine the overhead and unit costs under each method. Missouri Company currently uses a normal cost system to allocate overhead based on direct labor hours. It is considering adopting activity-based costing. Calculations are required to determine the unit costs of Hardware X and Accessory Y under the current method and activity-based costing using estimated production volumes, direct costs, budgeted overhead, and estimated overhead activities for each product.

Uploaded by

Ryze
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

PROBLEMS

p13-1 Wichita Company is using the traditional costing method. lt applies overhead based on
of using the
direct labor cost: Ouring ifre year, Wichita is wondering about the effects
as follows:
activity-based costing tJtn" ,hit cost so it also gathered relevant information

Budgeted Production costs:


Materials ?150,000
Diiect labor 100,000
Overhead 200,000
Total

Budgetedoverhead activities:
Budgeted
Activities Cost Driver Cost
Engineering hours ?40,000 1,000 hours
Engineering
Number of SetuPs 30,000 600 setups
Machine setuP
Material handling No. of material moves 50,000 5,000 MOVES

Number of inspections 80,000 4,000 inspection


lnspection
Total _*1209.009_

following costs:
Wichita completed two job orders 212 and 214 during the year with the
Job2'12 Job214
't00 150
lJnits completed

Manufacturing costs:
Materials P12,000 ?24,O00
Direct labor 10,000 19,000
? ?
Overhead

Overhead activities:
Engineering hours 80 90
,IB
No. of setuPs 20
No. of material moves' 150 220
No. of insPections 200 300
Required: Calculate the following:
a. Overhead cost assigned to Jobs 212 and214 under the traditional method
b. Overhead cost assigned to Jobs 212 and 214 under the activity-based costing
c. Unit cost of Jobs 212 and 214 underthe traditional method
d. Unit cost of Jobs 212 and 214 under the activity-based costing

P13-2 Missouri Company produces two products: Hardware X and Accessory Y. Missouri
currently uses a normalcost system in which overhead costs are allocated to products
based on direct labor hours. Missouri will be installing new cost accounting software
by end of the current year and it is also considering to adopt the activity-based costing
to charge [Link] products instead of using the firm-wide overhead rate that it
currently uses.
For the fiscal year 2016, Missouri forecasted to produce 5,000 units of Hardware X and
4,000 units of Accessory Y. The production of each hardware requires two direct labor
hours and each accessory requires one-half hour. Below is the prime costs included in
the each product:

HardwareX Accessory Y
unit
Direct materials per P40 F16
Direct labor perunit ?20 p4

Total estimated factory overhead lor 2016 is shown below:

Budgeted Estimated
overhead Volume
Machine setups F 90,000 20 setups
Materialhandling 140,000 4,000 tbs.
Packaging and shipping 190,000 500 boxes
Total _"42AJAA_
Based on the analysis of the above overhead activities, it was estimated that
the two products would require the following:

handling
Material 1,000 lbs. 3,000 tbs. 4,000 lbs.
shipping
Packaging and 400 boxes 100 boxes 500 boxes

Required, Catcutate the following:


a. Unit cost of Hardware X and Accessory Y using a plant-wide overhead rate based
on direct labor hours.
b. Activity cost rates for (a) machine setups, (b) material handling and (c) packaging
and shipping
c. Unit cost of Hardware X and Accessory Y using the activity-based costing system.

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