Assigning Costs Using Traditional System, ABC System
Larkspur Corp. manufactures bird feeders. It currently has two product lines, the standard and the deluxe. Larkspur has a total of $137,250 in overhead.
The company has identified the following information about its overhead activity pools and the two product lines:
|
| Cost Assigned to Pool | Qty Consumed by Standard | Qty Consumed by Deluxe |
Activity Pools | Cost Driver | |||
Material handling | Number of moves | $ 3,500 | 20 moves | 50 moves |
Quality control | Number of inspections | $ 33,750 | 250 inspections | 125 inspections |
Machine | Number of | $100,000 | 5,000 machine | 5,000 machine |
maintenance | machine hrs |
| hours | hours |
Required:
1.Suppose Larkspur used a traditional costing system with machine hours as the cost driver. Determine the amount of overhead assigned to each product line.
2. Calculate the activity rates for each cost pool in Larkspur's ABC system.
3. Calculate the amount of overhead that Larkspur will assign to the standard line if it uses an ABC system.
4. Determine the amount of overhead Larkspur will assign to the deluxe line if it uses an ABC system.
5. Compare the results for a traditional system with that of an ABC system. Which do you think is more accurate and why?
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