Problem - Traditional Product Costing versus Activity Based Costing
High Country Outfitters, Inc., makes backpacks for large sporting goods chains that are sold under the customers store brand names. The accounting department has identified the following overhead costs and cost drivers for the next year:
Overhead Item Expected Costs Cost Driver Maximum Quantity
Setup costs........................$936,000 Number of Setups.......................7200
Ordering costs.....................$240,000 Number of orders.......................60,000
Maintenance.......................$1,200,000 Number of machine hours........80,000
Power....................................$120,000 Number of kilowatt hours..........600,000
Total predicted direct labor hours for next year is 60,000. The following data are for tow recently completed jobs:
Job 201 Job 202
Cost of Direct Materials $13,500 $15,000
Cost of Direct Labor $19,125 $71,250
Number of units completed 1,125 915
Number of direct labor hours 270 330
Number of setups 18 22
Number of orders 24 45
Number of machine hours 540 450
Number of kilowatt hours 270 360
Required:
a) Determine the unit cost for each job using a traditional plantwide overhead rate based on direct labor hours
b) Determine the unit cost for each job using ABC (Round answers to two decimal places).
c) As the manger of High Country, is there additional information that you would want to help you evaluate the pricing and profitability of Jobs 201 and 202?
d) Assuming the company has been using the method required in part a, how should management react to the finding in part b?