Harris systems specializes in servers for workgroup, e-commerce, and ERP applications. The company's original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate $22 per direct labor hour. A task force headed by Harris CFO recently designed an ABC system with four activities. The ABC system retains the current systems two direct cost categories. Thus, it budgets only overhead costs for each activity. Pertinent data follow:
Activity Allocated Base Cost Allocated Rate
Materials handling Number of parts $ 0.85
Machine setup Number of setups 500.00
Assembling Assembling hours 80.00
shipping Number of shipments 1,500.00
Harris Systems has been awarded two new contracts, which will be produced as job A and job B. budget data relating to the contracts follow:
Job A Job B
Number of parts 15,000 2,000
Number of setups 6 4
Number of assembling hours 1,500 200
Number of shipments 1 1
Total direct labor hours 8, 000 600
Number of output units 100 100
Direct materials cost $220,000 $30,000
Direct labor cost $160,000 $12,000
Requirements:
1. Compute the product cost per unit for each job, using the original costing system (with two direct cost categories and a single overhead allocation rate).
2. Suppose Harris systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
3. Which costing systems more accurately assigns to jobs the cost of the resources consumed to produce them? Explain.
4. A dependable company has offered to produce both jobs for Harris for $5,400 per output unit. Harris may outsource (buy from the outside company) either job A only, job B only, or both jobs. Which course of action will Harris's managers take if they base their decision on (a) the original system? (b) ABC system cost? Which course of action will yield more income? explain