Help Essay

348 words - 2 pages

4-14. Traditional vs. ABC
The following cost information is available for Senkowski, Ltd.:
Activity | Allocation Base | Volume of Activity | Overhead Cost |
Purchasing | Purchase orders | 30,000 | $150,000 |
Receiving | Shipments received | 15,000 | 60,000 |
Machine setups | Setups | 2,500 | 200,000 |
Quality control | Inspections | 18,000 | 90,000 |

Direct materials are $15 per unit for luxury handbags and $11 per unit for deluxe handbags. There were 12,500 direct labor hours, each of which was charged to inventory at $18 per hour.
Required
A. Management is trying ...view middle of the document...

C. Which costing method do you think is better for the company? Why?

4-14 (LO2, 3, and 4—Traditional versus ABC)

A. Traditional allocation: The overhead rate based on direct labor hours is $40.00 per direct labor hour ($500,000 total overhead ÷ 12,500 direct labor hours).

ABC allocation: The overhead rate for each activity is as follows:

Purchasing: | $150,000 ÷ 30,000 = $5.00 per purchase order |
Receiving: | $60,000 ÷ 15,000 = $4.00 per shipment |
Machine setups: | $200,000 ÷ 2,500 = $80.00 per setup |
Quality control: | $90,000 ÷ 18,000 = $5.00 per inspection |

B. Traditional allocation: 8 direct labor hours $40 = $320

ABC allocation:

Purchasing: | $ 20.00 | (4 purchase orders $5) |
Receiving: | 12.00 | (3 shipments $4) |
Machine setups: | 160.00 | (2 setups $80) |
Quality control: | 60.00 | (12 inspections $5) |
Total | $252.00 | |

C. ABC allocates less overhead to the batch than traditional costing does. Because ABC allocates overhead to products on the basis of the activities that cause overhead costs to be incurred, rather than on the basis of an arbitrary driver associated with volume, ABC results in more accurate product costing.

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