Question - Electronic Inc (EI) produces three types of circuit boards, A, B and C for the Computer Manufacturers and after sales maintenance industries. The cost system used by EI until 2013 was classified as the traditional where all cost except direct material and direct labour were allocated to each board based on the direct labour hours used to produce them, (i.e direct labour was the cost driver). The new Management accountant undertook a cost study to improve the costing and pricing of the boards and it was determined that they were six clearly identifiable cost pools which could be used to implement an ABC costing system. The following table details the budgeted information for the year 2015. Total Indirect Production cost for the year is budgeted to be $ 13,646,500. Board A Board B Board C Total Cost Units to be produced 100,000 8,000 50,000 Direct material $66 per unit $88 per unit $45 per unit $ 9,554,000 Direct labor 4 hrs per unit 18 hrs per unit 9 hrs per unit $ 13,916,000 The cost pools, their drivers and costs are listed in the table below based on the cost study performed by the Management Accountant. Activity cost pools Cost driver Estimated overhead cost Expected activity Expected activity Expected activity Board A Board B Board C Machining Cost Machine hours (MHR) 9,360,000 7 MHR per unit 15 MHR per unit 9 MHR per unit Material Handling Kilograms of material handled 1.296,000 3 kg per unit 4 kg per unit 2 kg per unit Production set ups Number of set ups 1,600,000 1,000 500 500 Production orders Number of production orders 256,500 3,000 2,000 700 Shipping Cost Number of orders shipped 1,140,000 693 907 $ 13,646,500 The selling price for the product is calculated at 140% of manufacturing cost.
Required
1. Compute the predetermined overhead rates under the traditional costing system and determine the total production cost for each product as well as the expected selling price.
2. Compute the ABC overhead cost for each product and determine the total production cost for each product and the expected selling price.
3. Discuss the effect to the organization of changing the costing method.