Review the Decision Case 1 (Harris Systems) in the following paragraphs. Answer the four case questions in the Requirements section of the case. In addition, address the following in one to two paragraphs:
- Compare and contrast ABC costing and traditional costing methods, giving examples.
- In the assigned case, which system provides a more accurate picture of the cost incurred to produce the jobs?
- Provide examples of manufacturers in your geographic area and explain which system would be best for them.
Respond to each directive or question in 1-2 paragraphs. Apply current APA standards for writing style to your work.
Case 1. Harris System specializes in servers for workgroup, e-commerce, and ERP appliances. 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 of $22 per direct labor hour. A task force headed by Harris's CFO recently designed an ABC system with four activities. The ABC system retains the current system's two different cost categories. Thus, it budgets only overhead costs for each activity. Pertinent data follow:
|
Activity
|
Allocation Base
|
Cost Allocation 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 assembly hours
|
1,500
|
200
|
|
Number of shipments
|
1
|
1
|
|
Total direct labor hours
|
8,000
|
600
|
|
Number of output units
|
100
|
10
|
|
Direct material cost
|
$220,000
|
$30,000
|
|
Direct labor cost
|
$160,000
|
$12,000
|
Requirements
- 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.
- Suppose Harris Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
- Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
- 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 Harry's managers take if they base their decision on (a) the original report system? (b) ABC system costs? Which course of action will yield more income? Explain?