36 Compare and Contrast Traditional and also Activity-Based Costing Systems

Calculating precise manufacturing price for each product is a an essential piece of details for a this firm decision-making. For example, knowing the price to produce a unit the product affects no only how a company budgets come manufacture the product, but it is regularly the starting point in determining the sales price.

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An crucial component in identify the complete production prices of a product or job is the ideal allocation that overhead. For part companies, the frequently less-complicated traditional technique does wonderful job of allocation overhead. However, for plenty of products, the allocation of overhead is a more complex issue, and also an activity-based costing (ABC) system is much more appropriate.

Another variable to consider in identify which that the two significant overhead allocation techniques to usage is the cost associated with collecting and analyzing information. When making their decision about which method to use, the agency must take into consideration these costs, both in time and also money. (Figure) compares overhead in the 2 systems. In countless cases, the ABC an approach is more expensive in terms of time and also other costs.

The difference in between the traditional method (using one cost driver) and the ABC technique (using multiple expense drivers) is more facility than merely the number of cost drivers. When direct labor is a large portion that the product cost, the overhead costs tend to be consistently pushed by one price driver, i m sorry is generally direct job or maker hours; the traditional an approach appropriately allocates those costs. When modern technology is a huge portion that the product cost, the overhead prices tend to be propelled by multiple drivers, so utilizing multiple price drivers in the ABC an approach allows for a an ext precise allocation the overhead.

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Overhead in timeless versus abc Costing TraditionalABC
Overhead assignedSingle expense driverMultiple expense drivers
Optimal usageWhen direct labor is a big portion that the product costWhen modern technology is a big portion of the product cost
OrientationCost drivenProcess driven

As shown with Musicality’s products, not only are there different expenses for each product when comparing timeless allocation v an activity-based costing, but ABC confirmed that the Solo product creates a loss for the company. Activity-based costing is a much more accurate method, since it assigns overhead based upon the activities that journey the overhead costs. It have the right to be concluded, then, that the cost and also subsequent gross loss because that each unit’s sales administer a an ext accurate picture than the all at once cost and gross benefit under the traditional method. (Figure) to compare the cost per unit utilizing the different price systems and also shows how different the costs can be relying on the technique used.

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How lot overhead would be allocated to every unit under the traditional allocation method?How lot overhead would certainly be allocated to every unit under activity-based costing?

(Figure)Carlton’s Kitchens renders two species of pasta makers: Strands and Shapes. The agency expects come manufacture 70,000 systems of Strands, which has a per-unit direct material cost of $10 and also a per-unit straight labor expense of $60. It additionally expects come manufacture 30,000 devices of Shapes, which has a per-unit material expense of $15 and a per-unit straight labor cost of $40. The is estimated that Strands will use 140,000 an equipment hours and also Shapes will require 60,000 device hours. Historically, the company has provided the classic allocation technique and used overhead in ~ a price of $21 per an equipment hour. It was determined that there to be three price pools, and the overhead for each expense pool is shown:

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What is the per-unit price for every product under the timeless allocation method?What is the per-unit expense for each product under alphabet costing?Compared to alphabet costing, to be each product’s overhead under- or overapplied?How much was overhead under- or overapplied for each product?

(Figure)Carlton’s Kitchen’s three price pools and also overhead estimates are together follows:

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The approximated overhead for the material price pool is estimated as $12,500, and also the estimate for the an equipment setup pool is $35,000. Calculation the allocation price per unit that brass and per unit of gold using:

The classic allocation methodThe activity-based costing method

(Figure)Portable Seats makes two chairs: folding and wooden. This info was acquired to evaluation the decision to take into consideration ABC:

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How much overhead would certainly be assigned to each unit under the classic allocation method?How much overhead would certainly be assigned to each unit under activity-based costing?

(Figure)Casey’s Kitchens renders two varieties of food smokers: Gas and also Electric. The firm expects to manufacture 20,000 systems of Gas smokers, which have a per-unit direct material cost of $15 and a per-unit straight labor cost of $25. It likewise expects come manufacture 50,000 units of electric smokers, which have actually a per-unit material expense of $20 and also a per-unit direct labor cost of $45. Historically, it has used the traditional allocation method and used overhead in ~ a rate of $125 per device hour. The was determined that there to be three cost pools, and also the overhead for each cost pool is as follows:

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What is the per-unit expense for every product under the timeless allocation method?What is the per-unit expense for every product under alphabet costing?

(Figure)Casey’s Kitchens’ three expense pools and also overhead approximates are as follows:

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The approximated overhead because that the material price pool is approximated as $45,000, and also the calculation for the maker setup pool is $55,000. Calculation the allocation rate per unit of silver and per unit of gold using:

The classic allocation methodThe activity-based costing method

(Figure)Portable Seats renders two chairs: folding and wooden. This info was obtained to testimonial the decision to consider ABC:

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Compute the overhead assigned to every product under:

The timeless allocation methodThe activity-based costing method

(Figure)Cape cod Adventures provides foam noodles with sales of 3,000,000 units per year and retractable boat oars v sales the 50,000 pairs per year. What information would Cape cod Adventures need in stimulate to readjust from classic to abc costing? What are the restrictions to activity-based costing?