Question - Activity Based Costing
The Try Corporation has a machining facility specializing in jobs for the aircraft-components market. Try's previous simple job-costing system had two direct-cost categories (direct materials and direct manufacturing labor) and a single indirect-cost pool (manufacturing overhead, allocated using direct manufacturing labor-hours). The indirect cost-allocation rate of the simple system for 2016 would have been $115 per direct manufacturing labor-hour.
Recently a team with members from product design, manufacturing, and accounting used an ABC approach to refine its job-costing system. The two direct-cost categories were retained. The team decided to replace the single indirect-cost pool with five indirect-cost pools. The cost pools represent five activity areas at the plant, each with its own supervisor and budget responsibility. Pertinent data are as follows:
|
Activity Area
|
Cost-Allocation Base
|
Cost-Allocation Rate
|
|
Materials handling
|
Parts
|
$ 0.40
|
|
Lathe work
|
Lathe turns
|
0.20
|
|
Milling
|
Machine-hours
|
20.00
|
|
Grinding
|
Parts
|
0.80
|
|
Testing
|
Units tested
|
15.00
|
|
Job 410
|
Job 411
|
|
Direct material cost per job
|
$ 9,700
|
$59,900
|
|
Direct manufacturing labor cost per job
|
$750
|
$11,250
|
|
Number of direct manufacturing labor-hours per job
|
25
|
375
|
|
Parts per job
|
500
|
2,000
|
|
Lathe turns per job
|
20,000
|
59,250
|
|
Machine-hours per job
|
150
|
1,050
|
|
Units per job (all units are tested)
|
10
|
200
|
Required:
1. Compute the manufacturing cost per unit for each job under the previous simple job-costing system.
2. Compute the manufacturing cost per unit for each job under the activity-based costing system.
3. Compare the per-unit cost figures for Jobs 410 and 411 computed in requirements 1 and 2. Why do the simple and the activity-based costing systems differ in the manufacturing cost per unit for each job? Why might these differences be important to Try Corporation?