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A Melbourne-based company Acacia is considering the adoption of an acitivity-based costing(ABC) system because they suspect that their traditional costing system distorts the product costs. Acacia produces and sells two products A and B. Their traditional costing system uses direct labor hours as the allocation base for manufacturing overhead cost.

Additional information

Product A Product B

Direct Material (DM) $38 per unit $28 per unit

Direct Labor (DL) $24 per unit $12 per unit

Units produced 50000 units 200000 units

The production managers decided that major activities are DL labor support, Machine setups and Parts administration and determined the costs for each activity. They also identified how many DLHs, setups and parts each product require as follows:

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Thank you

Activity Cost Product A Product B

Direct labor support(DLHs) $900,000 100,000 DLHs 200,000 DLHs

Machine setups(setups) $600,000 400 setups 100 setups

Parts administrtion (part types) $300,000 200 parts 200 parts

Total MOH $1,800,000

Compared with the unit product cost calculated by the ABC system, what is distortion(difference) created by the traditonal costing system for Product A?

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Accounting Basics, Accounting

Category:- Accounting Basics
Reference No.:- M9957495

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