The manufacturing division of an electronics company uses activity-based costing. The company has identified three activities and the related cost drivers for indirect production costs.
Activity Cost Driver
Activity 1 Direct materials cost
Activity 2 Direct labor cost
Activity 3 Kilowatt hours
Three types of products are produced. Direct costs and cost-driver activity for each product for a month are as follows:
- Product A Product B Product C
- Direct materials cost $75,000 $50,000 $125,000
- Direct labor cost $6,000 $1,000 $3,000
- Direct labor hours 1,000 500 1,500
- Kilowatt hours 150,000 200,000 150,000
- Indirect production costs for the month are as follows:
- Activity 1 $12,000 Activity 2 20,000 Activity 3 16,000 Total $48,000
Required:
A) Compute the indirect production costs allocated to each product using the ABC system.
B) Compute the indirect production costs allocated to each product using a traditional costing system.
Assume indirect production costs are allocated to each product using the cost driver: direct labor hours.