Question

DP, Inc. produces parts for industrial grinders. The typical product goes through two processes, machining and finishing, before being packaged and shipped to the customer. DP holds no finished goods inventory. All production is triggered by a customer order. The company uses a traditional cost system and applies overhead to jobs based on machine hours. The cost accounting manager at DP has been considering updating its cost system given the growth in overhead costs. He has collected data on the major categories of overhead. The estimated annual costs follow. Overhead Category Material handling Machining Finishing Shipping Setups Annual Cost $15,750,000 31,500,000 10,500,000 7,875,000 18,375,000 $84,000,000 Total As part of the effort to determine whether it would be worthwhile to update the cost system, the cost accounting manager has collected data on three representative jobs completed in April. Data on those jobs follow Job 0404 Job 0407 Job 0411 Direct material 43,260 73,000 $135,700 Machine hours 2,170 1,370 1,770 1,170 4,000 2,170 Units Production runs 1 1 Orders 1 1 Nw

Answer 1

Calculation of unit cost using traditional system
	Job 0404	Job 0407	Job 0411
Direct Material	43,260	73,000	135,700
Overheads	141,600	173,600	320,000
Total cost	184,860	246,600	455,700
Number of Units	1,170	1,370	2,170
Unit cost	158	180	210
Using ABC
	Job 0404	Job 0407	Job 0411
Direct Material	43,260	73,000	135,700
Overheads
Material Handling	21,630	36,500	67,850
Machining	53,100	65,100	120,000
Finishing	98,280	115,080	182,280
Shipping	78,750	157,500	78,750
Setups	105,000	315,000	105,000
Total cost	400,020	762,180	689,580
Number of Units	1,170	1,370	2,170
Unit cost	342	556	318