Question - Contrasting Traditional and ABC Costing) Brixton Industries makes three products: widgets, gadgets, and helios. The following budget information relates to Brixton for next year.
|
Widgets
|
Gadgets
|
Helios
|
|
Sales and production (units)
|
50,000
|
40,000
|
30,000
|
|
Selling price (per unit)
|
$45
|
$95
|
S73
|
|
Direct labour and materials (per unit)
|
$32
|
$84
|
565
|
|
Machine hours per unit in Machining Dept.
|
2
|
5
|
4
|
|
Direct labour hours per unit in Assembly Dept.
|
7
|
3
|
2
|
Overhead is allocated to production departments as follows:
- Machining Department at $1.20 per machine hour
- Assembly Department at $0.825 per direct labour hour
However, you have determined that the overheads could be reanalyzed into cost pools as below:
|
Cost pool
|
Cost ($)
|
Cost Driver
|
Quantity
|
|
Machining services
|
357,000
|
Machine hours
|
420,000
|
|
Assembly services
|
318,000
|
Direct labour hours
|
530,000
|
|
Set-up
|
26,000
|
Set-ups
|
520
|
|
Order processing
|
156,000
|
Customer orders
|
32,000
|
|
Purchasing
|
84,000
|
Supplier orders
|
11,200
|
You have also been provided with the following estimates for the current accounting period.
|
Widgets
|
Gadgets
|
Helios
|
|
Number of set-ups
|
120
|
200
|
200
|
|
Customer orders
|
8,000
|
8,000
|
16,000
|
|
Supplier orders
|
3,000
|
4,000
|
4,200
|
1. Prepare a report showing profitability for each product for the next year using the traditional overhead allocation method.
2. Prepare a report showing profitability for each product using activity-based costing.
3. Explain the differences between the products' profitability using traditional and activity-based costing.