Question

CP19-46 (similar to) Using a job order costing system, Pierre Computer Company estimated the total cost of two jobs as follows: (Click the icon to view the estimates under job costing.) |(Click the icon to view the ABC information.) (Click the icon to view the records for two clients.) Pierre Computer Company is now considering using an ABC system. Information about ABC costs and records for the same two jobs for 2020 follow: Read the requirements. Requirement 1. Compute the total cost for each job using activity-based costing (ABC). The cost of direct labor is $15 per hour. Activity-based costing: Job 721 Job 722 Direct costs: Total direct material costs Total direct labor costs Indirect costs: Asssembly costs Programming costs Testing costs Total costs

Answer 1

Solution

Pierre Computer Company

Computation of the total cost for each job using activity-based costing:

Total cost for each job: Job Job 721 722 $22,300 $2,000 $23,520 $1,960 Direct Costs: Total direct material costs Total direct labor cost Indirect Costs: Assembly costs Programming costs Testing Costs Total Costs $880 $80 $4,620 $385 $5,040 $1,260 $56,360 $5,685

Computations –

Indirect costs –

Assembly costs at $0.40 per part

Job 721 = $0.40 x 2,200 parts = $880

Job 722 = $0.40 x 200 parts = $80

Programming costs at $5.50 per direct labor hour

Job 721 = $5.50 x 840 DLH = $4,620

Job 722 = $5.50 x 70 DLH = $385

Testing costs at $140 per test –

Job 721 = $140 x 36 tests = $5,040

Job 722 = $140 x 9 tests = $1,260

1. Is the job cost greater or less than that computed under standard costing for each job? Why?

The cost of the Job 721 using ABC is $5,836 more than the job cost under the standard costing (single-allocation basis) system. Under the ABC costing system we can tell that this job is consuming more resources than was being accounted for under the single-allocation-base-system, causing Job 721 to be less under the standard costing system.

The cost of the Job 722 using ABC is $1,333 more than the job cost under the standard costing (single-allocation basis) system. Under the ABC costing system we can tell that this job is consuming more resources than was being accounted for under the single-allocation-base-system, causing Job 722 to be less under the standard costing system.

Under the standard costing system, overhead is allocated to the two jobs based solely on a percentage of direct labor costs, using a single predetermined overhead allocation rate. The costing system ignores the way the two jobs actually use the company’s resources (activities). ABC takes into account assembling, programming and testing activities when allocating overhead costs to the two jobs. Because ABC reflects the way the jobs actually use the company’s resources, ABC costs are closer to the true costs of completing each job.

2. Determination of the sales price for each of these two customers to meet the target income equal to 20% of the total cost:

Job 721 $56,360 Job 722 $5,685 Total Cost Operating income (20% of total cost) Sales Price $11,272 $67,632 $1,137 $6,822