Managerial Accounting Case Study: Activity-Based Costing as an Alternative to Traditional Product Costing

Activity Based Costing as an Alternative to Traditional Product Costing

If manufacturing overhead rates were allocated based on direct labor hours , the hundred fifty thousand dollars 750 ,000 ) and two hundred fifty thousand dollars 250 ,000 ) for the mono-relay and bi-relay , respectively . This is computed by multiplying the one million dollars 1 ,000 ,000 ) manufacturing overhead with the over the overhead cost per unit of product is eighteen dollars and seventy-five cents 18 .75 ) and twenty-five dollars 25 ) for the mono-relay and the bi-relay , respectively . This is arrived at by dividing the manufacturing

overhead cost allocated to each product with the number of units produced . The cents 62 .75 ) and eighty-five dollars 85 ) for the mono-relay and bi-relay , respectively

If the manufacturing overhead rate was allocated based on Activity Based Costing , the manufacturing overhead rate will be allocated to each activity pools as follows : maintaining parts - sixty thousand dollars 60 ,000 ) and one hundred twenty thousand dollars 120 ,000 ) for the mono-relay and bi-relay , respectively processing - seventy-two thousand dollars 72 ,000 ) and eighteen thousand dollars 18 ,000 ) for the mono-relay and bi-relay , respectively quality control - one hundred thousand dollars 100 ,000 ) and one hundred thirty thousand dollars 130 ,000 ) for the mono-relay and bi-relay , respectively and machine-related overhead - two hundred thousand dollars 200 ,000 ) and three hundred thousand dollars 300 ,000 ) for the mono-relay and bi-relay , respectively . This is computed by multiplying the pre-determined overhead cost for each activity with ratio as given in the problem

The thousand dollars 432 ,000 ) and five hundred sixty-eight dollars 568 ,000 ) for the mono-relay and bi-relay , respectively . The figure is arrived at by adding the manufacturing overhead allocated to the each activity pool for each of the product , as computed above

The unit product cost per unit of product , using Activity Based Costing is ten dollar and eighty cents 10 .8 ) and fifty-six dollars and eighty cents

The bi-relay is not more profitable than the mono-relay . Since the company is producing seventy-five percent less bi-relay than mono-relay the cost of maintaining parts inventory , quality-control and machine-related cost is much higher per unit of bi-relay than mono-relay

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