Question

Problem 3: Rawls Company (Overhead Allocation) The following table provides information about Rawls Company that produces two products, cell phones and tablets. Activity level Cell phones Activity Cost Driver Tablets Cost Production Setup Material Handling Packaging and shipping $180,000 $15,000 Number of units shipped $60,000 $255,000 Number of setups Number of parts 10 20 19 31 25,000 15,000 Total Overhead Costs Compute the amount of overhead allocated to one tablet if ABC principles are used to allocate overhead costs (0.5 point) and discuss advantages and disadvantages using ABC method, compared to using traditional volume-based OH allocation, in this specific setting (0.5 point).

Answer 1

Computation of Overhead allocated to 1 Tablet in ABC
Activity	Cost	Total No. of Costdriver	Cost/Costdriver	No. of Costdriver for Tablet	Allocated overhead cost to tablet
Production Setup	$1,80,000	30	$6,000	20	$1,20,000
Material Handling	$15,000	50	$300	31	$9,300
Packaging and shipping	$60,000	40000	$1.5	15000	$22,500
Total	$2,55,000				$1,51,800
No. of Units					$15,000
Overhead for 1 unit of Tablet					$10.12

Advantages of ABC:

• Realistic cost can be obtained. Here, if Traditional costing would have been used, Overhead cost would be same for 1 unit of Tablet or Cell Phone i.e. $2,55,000/40000 units = $6.38 per unit even though the highest costing activity Production setups are double in Tablets than cell phones.
• The overhead is allocated based on usage of activity in ABC, which gives more accurate cost.
• Precise Profit Margins for all Products can be obtained.

Disadvantages of ABC:

• Data collection for ABC can be Time consuming.
• Cost increases for accumulation and analysing of information.
• Costing as per ABC many times don't confirm with Generally Accepted Accounting Principles and can't be used for External Reporting.