Question

How can you explain the switch from traditional costing to ABC will impact the selling price of your company's products or services. Please give some examples.

Answer 1

Switch from traditional costing to ABC may impact the selling price of our products, if we follow markup on cost basis of determining the prices.
It's true that overall overhead costs remain same. However, difference occurs in allocating these overhead costs to individual products.
Under traditional overhead allocation system, overhead costs are allocated based on plant wide mahine hour or labor hour basis. However under activitiy based costing it is allocated on the basis of activity identified based on cost drivers.
For under standing lets take an example.
Total direct labor required
Product A	4000	Hours
Product B	3500	Hours
Total Overhead costs	$75,000
These overhead consist of the following activities:		Product A	Product B
Setup cost	$50,000	50 setups	50 setups
Purchase order cost	$25,000	20 orders	5 Orders
	$75,000
Assume company markups it's cost to 400% of overhead cost.
	Product A	Product B
Selling price under Traditional system
Overhead cost allocated	$40,000	$35,000
Markup	$160,000	$140,000
Selling price under Traditional system	$200,000	$175,000
Selling price under ABC system
Overheads allocated - setup cost	$25,000	$25,000
Overheads allocated - purchase order cost	$20,000	$5,000
	$45,000	$30,000
markup @400%	$180,000	$120,000
Selling price under ABC system	$225,000	$150,000
Hence, difference can be seen in the final selling prices. Where under traditional system Price of pruduct A is $200,000 in the ABC system it is 225,000.