Question

A Melbourne-based company Acacia is considering the adoption of an activity-based costing (ABC) system because they suspect that their traditional costing system distorts the product costs. Acacia produces and sells two products A and B. Their traditional costing system uses direct labor hours as the allocation base for manufacturing overhead cost. Additional information: Product A Product B Direct materials (DM) $38 per unit $28 per unit Direct labor (DL) $24 per unit $12 per unit Units produced 50,000 units 200,000 units The production managers decided that major activities are DL labor support, Machine setups, and Parts administration and determined the costs for each activity. They also identified how many DLHs, setups, and parts each product requires as follows: Activity Cost Product A Product B Direct labor support (DLHS) $900,000 100,000 DLHs 200,000 DLHS Machine setups (setups) $600,000 400 setups 100 setups Parts administration (part types) $300,000 200 parts 200 parts Total MOH $1,800,000 Compared with the unit product cost calculated by the ABC system, what is the distortion (difference) created by the traditional costing system for Product A? A. Product A is overcosted by S 1.65 B. Product A is undercosted by S 1.65 C. Product A is overcosted by S 6.60 D. Product A is undercosted by E. None of the above S

Answer 1

The answer has been presented in the supporting sheet. All the parts has been solved with detailed explanation and format. For detailed answer refer to the supporting sheet.

Answer 2 The correct answer is D) Product A is undercosted by $ 6.6 4 Firstly we have to calculate the overhead per unit of Product A 5 = (1800000/300000*100000)/50000 6 = $ 12 8 Now we have to calculate the overheads assigned to per unit of product A 9 Firstly we have to caluclate the overhead recovery rate 750 11 Activity Cost Number of Activity Recovery Rate 12 Direct Labour Support 900000 300000 13 Machine Set ups 600000 500 1200 14 Parts adminstration 300000 400 15 16 Statement for calculation per unit of Product A overheads under ABC Costing 17 Direct Labour Support 100000 300000 18 Machine Set ups 400 1200 480000 19 Parts adminstration 200 150000 20 Total Overheads 930000 21 No. of Products A Produced 50000 22 Per unit of Overheads of Product A 18.6 23 24 Thus the Product A is under costed by = overheads cost of product a under ABC costing - overhead cost of product a under traditional costing 25 = $ 18.6 - $ 12 26 = $ 6.6 shoot