BULE HORA UNIVERSITY
FACULTY OF BUSINESS AND ECONOMICS
Master of Arts Degree in Project Management-Weekend Program
Course Name: Cost & Management Control Systems in Project
Individual Assignment presentation
Prepared by: Wubishet Wegene
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INTRODUCTION
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Q.1 & 2. Using the traditional costing method, compute the overhead costs
per product and total cost per product
Manufacturing Products
Costs
Widgets Gadgets Smidgets Smadgets
Direct Labor 100,000 300,000 400,000 200,000
Direct Material 100,000 200,000 150,000 250,000
Over head Costs 200,000 600,000 800,000 400,000
Total Cost
400,000 1,100,000 1,350,000 850,000
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Illustration on Question 1 & 2
• Total Cost = Direct Labor cost + Direct Material Cost + Over head
Costs
• Over head Cost is given as 200% of Direct Labor cost
• Hence OH cost for Widgets= 100,000 * 200% = 200,000
Gadgets = 300,000* 200% = 600,000
Smidgets = 400,000 * 200% = 800,000
Smadgets = 200,000 * 200% = 400,000
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Q.3a
Calculate the activity-based overhead rates per activity cost driver.
• 1ST step- calculating activity rate overhead rates= estimated overhead
costs per activity *Total units for each cost driver
Overhead Cost Driver Estimated Overhead Expected Cost Activity-based
Drivers / Activity Overhead Rates
Depreciation 300,000 3000 100
Set up 700,000 1000 700
Rent 1,000,000 100,000 10
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Q 3b. For each product, compute the overhead costs per activity cost driver.
• Total overhead costs per product = the activity-based overhead rates
* each product’s expected use of the overhead costs drivers
• WIDGETS; 500 Machine hrs * $100/machine hrs=$ 50,000
Overhead Cost PRODUCTS
Driver
WIDGETS GADGTES SMIDGETS SMADGETS
DEPRECIATION 50,000 90,000 40,000 120,000
SETUP 140,000 210,000 70,000 280,000
RENT 200,000 300,000 100,000 400,000
TOTAL OH COSTS
390,000 600,000 210,000 800,000
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Q.3c. Using the overhead costs from B., calculate the total costs per product.
• Total Cost= DL + DM + Total OH cost calculated in above 3b
Manufacturing Products
costs
Widgets Gadgets Smidgets Smadgets
DL 100,000 300,000 400,000 200,000
DM 100,000 200,000 150,000 250,000
OH 390,000 600,000 210,000 800,000
Total Cost 590,000 1,100,000 760,000 1,250,000
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Question no.4: Assuming ABC allocated overhead more accurately, which products were incorrectly priced using
the traditional costing method? What difficulties might result from incorrectly budgeted products? Hint: Think
about how capital resources should be allocated to the most efficient opportunities.
Manufacturing Products
Costs
Widgets Gadgets Smidgets Smadgets
Total Cost using ABC
method 590,000 1,100,000 760,000 1,250,000
Total Cost Using
Traditional Costing 400,000 1,100,000 1,350,000 850,000
Over/under
allocated Cost 190,000 0 -590,000 400,000
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Answer for Q.4 continued
• Three of the four products were mispriced using TCA.
• Widgets and Smadgets were under-priced by $190,000 and $400,000, respectively.
• Smidgets were overpriced by $590,000. Only Gadgets was priced correctly (TCA = $1,100,000 versus ABC =
$1,100,000).
• A number of managerial difficulties arise from incorrectly budgeting different product lines. Mispriced
products lead to biased performance comparisons. Departments receiving excess budgets appear more
efficient at reducing costs than the other manufacturing lines. The opposite is true for departments receiving
too little funding. Traditional costing also assigns overhead costs without taking into account the varying
overhead demands between departments. The result is that management has more difficulty assessing
overhead costs that will reduce a department’s overall costs. Budgeting inaccuracy also reduces production
capacity. Departments without proper funding might not have adequate funding to manufacture enough
products to meet customer demands. The problem escalates if one product line is an input for another
product. Furthermore, budgeting inaccuracy also reduces investment opportunities. More accurate
budgeting will allow management to use resources more efficiently. Over budgeting a product may reduce
the amount or resources available for other opportunities (e.g., marketing). Under budgeting products can
prevent the firm from meeting customer demand
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Q.5; What actions might be explored to deal with the mispriced
products?
• The most logical approach is for the CFO to propose adopting the ABC
model, ceteris paribus.
• Rubrics Corporation would realize $400,000 in savings which could be
used, in part, for implementing the ABC system.
• ABC costing would also more accurately assign budgets to the
individual production lines and allow management to assess efficiency
and investigate cost reducing alternatives
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Q.6; Compare assigned costs per product under both methods. Why had
activity-based costing changed the total costs assigned to each product?
• The traditional costing method fails to consider varying overhead
requirements between products. Traditional costing uses one overhead rate
based on historical overhead expenses for the entire manufacturing process.
A single overhead rate fails to capture differences in per unit overhead
expenses, resulting in excessive budgeting for products with smaller per unit
overhead expenses.
• Activity-based costing assigns overhead rates based on specific overhead cost
pools. The method then assigns the rates to the unit requirements of these
cost pools per product. The result is overhead expenses that reflect the
differing overhead requirements for the individual product. The end result is
total expenses that more accurately represent differences in per unit
overhead expenses.
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Q.7; What were two circumstances where traditional and ABC costing would
likely yield similar or equal overhead costs?
• Activity-based costing was developed to help management more accurately
budget separate manufacturing lines. The system has become increasingly
popular as manufacturing processes grow increasingly sophisticated.
• However, ABC is more expensive to implement, requiring management to
research the individual overhead requirements per product. Before
pursuing ABC costing, management should assess whether traditional
costing makes more sense.
• Traditional costing is equally effective under many circumstances, two
possible circumstances are, but are not limited to: 1) Manufacturing
companies with extremely low overhead costs. 2) Companies where direct
labor costs have proven an effective cost driver of overhead expenses
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