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Manufacturing Cost Analysis: ABC vs Traditional

1. The document provides information on manufacturing costs per unit using traditional and activity-based costing (ABC) methods. ABC allocates overhead costs based on activities and cost drivers, resulting in different per unit costs than the traditional method. 2. It then gives an example of calculating overhead costs per box for a medical testing order using ABC. The overhead rate is calculated based on budgeted overhead and machine hours. 3. Finally, it compares the assigned overhead costs for a product using the traditional lump sum method versus ABC. ABC allocated more overhead, showing the traditional method undercosted by $2720.

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Malene Mandrup Therkelsen
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5 views2 pages

Manufacturing Cost Analysis: ABC vs Traditional

1. The document provides information on manufacturing costs per unit using traditional and activity-based costing (ABC) methods. ABC allocates overhead costs based on activities and cost drivers, resulting in different per unit costs than the traditional method. 2. It then gives an example of calculating overhead costs per box for a medical testing order using ABC. The overhead rate is calculated based on budgeted overhead and machine hours. 3. Finally, it compares the assigned overhead costs for a product using the traditional lump sum method versus ABC. ABC allocated more overhead, showing the traditional method undercosted by $2720.

Uploaded by

Malene Mandrup Therkelsen
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Homework chapter 5:

Question 1:

Requirement 1: Manufacturing cost per unit - Traditional


Direct labor hours=25.000
Overhead (on the basis of direct-labor hours)=800.000
POHR=800.000/25.000=32 predetermined overhead application rate

Standard (costs per unit)


DM=$24
DL=3*$12=36
OH=3(machine hours per unit)*32(POHR)=96
Total=157

Enhanced:
DM=$40
DL=4*12=48
OH=4(machine hours per unit)*32(POHR)=128
Total=216

Requirement 2: Manufacturing cost per unit - ABC

Activity pool Cost Activity Rate Standard Enhanced


driver
Order 150.000 /500 =$300 *300=90.000 *200=60.000
processing
Machine 560.000 /40.000 =$14 *18.000= *22000=308000
processing 252000
Product 90.000 /10.000 =$9 *2000=18000 *8000=72000
inspection
Total 360.000 980000
/ number of /3000 /4000
units
OH per unit $120 $110

Manufacturing cost per unit – ABC:


Standard: DM+DL+OH=24+36+120=181
Enhanced: DM+DL+OH=40+48+110=198

Requirement 3a
Standard: 157 (traditional) – 181 (ABC) = -24 (Undercosted)
Enhanced: 216 (traditional) – 198 (ABC) = 18 (Overcosted)

Requirement 3b
Yes.
Question 2:

Requirement 1 and 2

Activity pool Cost Activity driver Rate Standard


Machine setups 250.000 /125 =$2000 *5=10.000
Material handling 75000 /37.500 =$2 *10.000= 20.000
Hazardous waste 25.000 /5000 =$5 *2000=10.000
control
Quality control 75.000 /1000 =$75 *10=750
Other overhead 200.000 /20.000 =$10 500=5000
costs
Total 45750
/ number of units /1.000
OH per unit (box) $45.75

Requirement 3:
Overhead rate: budgeted overhead/budgeted machine hours=625.000/20.000=31.25 per machine hour

Requirement 4:
Total/applied overhead for the medical-testing order= POHR*actual machine hours=31.25*500=$15.625

Overhead cost per box: 15.625/1000=$15.63 per box

Question 3:

Requirement 1
Assigned cost (traditional): 105.000*0.15=18.900

Assigned cost (ABC):


Incoming material inspection: 18(rate)*20(quantity)=360
In-process inspection: 0.32(rate)*40.000(quantity)=12800
Product certification: 141(rate)*60(quantity)=8460
Total=21620

18.900-21.620=-2720 – traditional system undercosts by $2720

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