Learning Objective

Understand how to usage the 5 steps that activity-based costing to identify product costs.

Question: intend the managers at SailRite firm decide that the services of implementing one activity-based costing system would exceed the cost, and thus the agency should usage activity-based costing come allocate overhead. What room the five steps that activity-based costing, and how would certainly this technique work because that SailRite?

 

Answer: Activity-based costing (ABC)A method of costing that offers several expense pools, and also therefore numerous predetermined overhead rates, organized by task to point out overhead costs. Offers several price pools, arranged by activity, to allocate overhead costs. (Remember the plantwide allocation provides one expense pool for the entirety plant, and department allocation supplies one cost pool because that each department.) The idea is that tasks are forced to create products—activities such together purchasing materials, setting up machinery, assembling products, and inspecting perfect products. These tasks can be costly. Hence the cost of activities should be allocated to products based upon the products’ usage of the activities.

You are watching: The first step in activity based costing is to


ABC in activity at SailRite Company

Five actions are required to implement activity-based costing. Together you job-related through the instance for SailRite Company, as soon as again note that total estimated overhead costs remain at $8,000,000. However, the total is damaged out into different activities quite than departments, and an overhead price is created for each activity. The 5 steps room as follows:

 

Step 1. Determine costly activities required to finish products.

An activityAny process or procedure that consumes overhead resources. Is any process or procedure that consumes overhead resources. The goal is to understand all the activities required to do the that company products. This needs interviewing and also meeting v personnel transparent the organization. Carriers that usage activity-based costing, such together Hewlett Packard and IBM, may identify hundreds of tasks required to make their products. The most difficult part that this action is narrowing under the activities to those that have actually the biggest affect on overhead costs.

After meeting through personnel throughout the company, SailRite’s accountant established the following tasks as having the biggest influence on overhead costs:

to buy materials setup up makers Running machines Assembling commodities Inspecting finished commodities

 

Step 2. Entrust overhead costs to the tasks identified in step 1.

This step calls for that overhead costs connected with each activity be assigned come the task (i.e., a expense pool is formed for every activity). Because that SailRite, the expense pool because that the purchasing materials activity will include costs for items such as earnings of to buy personnel, rent for purchasing department office space, and depreciation of to buy office equipment.

The accountant at SailRite emerged the following allocations after mindful review of all overhead prices (remember, these space overhead costs, not direct materials or straight labor costs):


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*We must note that this is not the straight labor cost. Instead, this represents overhead costs linked with assembling products, such together supplies and also the factory an are being supplied for assembly.


At this point, us have identified the many important and costly tasks required to do products, and we have actually assigned overhead costs to each of this activities. The following step is to uncover an allocation base that drives the expense of every activity.

 

Step 3. Identify the cost driver for each activity.

A price driverThe action that reasons the costs linked with one activity. Is the action that reasons (or “drives”) the costs connected with the activity. Identifying cost drivers requires gathering information and also interviewing vital personnel in various locations of the organization, such as purchasing, production, top quality control, and also accounting. After mindful scrutiny that the process required because that each activity, SailRite established the following price drivers:


Activity Cost Driver Estimated yearly Cost Driver Activity
Purchasing materials Purchase requisitions 10,000 requisitions
Setting up machines Machine setups 2,000 setups
Running machines Machine hours 90,000 hours
Assembling products Direct labor hours 250,000 hours
Inspecting finished products Inspection hours 20,000 hours

Notice the this information includes an estimate of the level of activity for each price driver, i beg your pardon is needed to calculate a predetermined rate for each activity in action 4.

 

Step 4. Calculate a predetermined overhead rate for every activity.

This is excellent by dividing the estimated overhead expenses (from step 2) through the approximated level of price driver activity (from step 3). Figure 3.4 \"Predetermined Overhead prices for SailRite Company\" offers the overhead price calculations for SailRite agency based ~ above the information presented in the previous 3 steps. It reflects that commodities will be fee $120 in overhead expenses for each purchase requisition processed, $800 because that each maker setup, $30 because that each maker hour used, $6 for each straight labor hour worked, and also $50 because that each hour of investigate time.


Figure 3.4 Predetermined Overhead rates for SailRite Company

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Step 5. Point out overhead expenses to products.

Overhead expenses are allocated to products by multiplying the predetermined overhead rate for each task (calculated in step 4) through the level of expense driver activity used through the product. The term applied overhead is frequently used to describe this process.

Assume the following annual cost driver activity takes ar at SailRite because that the simple and luxurious sailboats:Notice the the total task levels presented here match the estimated task levels gift in step 4. This to be done to protect against complicating the example with overapplied and also underapplied overhead. However, a an ext realistic scenario would administer actual task levels the are different than estimated activity levels, thereby producing overapplied and underapplied overhead for each activity. We explained the disposition that overapplied and underapplied overhead in chapter 2 \"How Is task Costing offered to Track manufacturing Costs?\".


Activity Basic Sailboat Deluxe Sailboat Total
Purchasing materials 7,000 requisitions 3,000 requisitions 10,000 requisitions
Setting up machines 1,100 setups 900 setups 2,000 setups
Running machines 50,000 hours 40,000 hours 90,000 maker hours
Assembling products 200,000 hours 50,000 hours 250,000 direct labor hours
Inspecting finished products 12,000 hours 8,000 hours 20,000 inspection hours

Figure 3.5 \"Allocation the Overhead costs to assets at SailRite Company\" shows the allocation the overhead utilizing the price driver activity just presented and the overhead prices calculated in figure 3.4 \"Predetermined Overhead rates for SailRite Company\". Notice that allocated overhead costs full $8,000,000. This is the same cost figure supplied for the plantwide and department allocation techniques we disputed earlier. Activity-based costing simply provides a an ext refined means to allocate the very same overhead costs to products.


Figure 3.5 Allocation that Overhead expenses to commodities at SailRite Company

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*Overhead allocated amounts to the predetermined overhead rate times the cost driver activity.

**Overhead price per unit because that the an easy model equals $5,020,000 (overhead allocated) ÷ 5,000 systems produced, and for the deluxe model, it amounts to $2,980,000 ÷ 1,000 systems produced.


The bottom of number 3.5 \"Allocation that Overhead prices to commodities at SailRite Company\" mirrors the overhead price per unit because that each product presume SailRite to produce 5,000 devices of the straightforward sailboat and also 1,000 devices of the deluxe sailboat. This info is essential to calculation the product expense for each unit the product, i m sorry we comment on next.


Product costs Using the Activity-Based Costing strategy at SailRite

Question: As shown in figure 3.5 \"Allocation of Overhead expenses to products at SailRite Company\", SailRite knows the overhead cost per unit using activity-based costing is $1,004 because that the simple model and $2,980 for the Deluxe. Now the SailRite has actually the overhead cost per unit, just how will the firm find the total product expense per unit and resulting profit?

 

Answer: Recall native our discussion earlier that the calculate of a product’s cost involves 3 components—direct materials, straight labor, and also manufacturing overhead. Assume direct materials expense $1,000 because that the an easy sailboat and also $1,300 because that the Deluxe. Straight labor expenses are $600 for the an easy sailboat and also $750 because that the Deluxe. This information, linked with the overhead cost per unit calculated at the bottom of figure 3.5 \"Allocation the Overhead expenses to assets at SailRite Company\", offers us what we require to recognize the product cost per unit because that each model, which is gift in number 3.6 \"SailRite agency Product costs Using Activity-Based Costing\". The mean sales price is $3,200 because that the straightforward model and $4,500 for the Deluxe. Using the product price information in number 3.6 \"SailRite firm Product costs Using Activity-Based Costing\", the basic model yields a profit of $596 (= $3,200 price – $2,604 cost) every unit and also the Deluxe design yields a loss that $530 (= $4,500 price – $5,030 cost) every unit.


Figure 3.6 SailRite agency Product costs Using Activity-Based Costing

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As you can see in figure 3.6 \"SailRite firm Product expenses Using Activity-Based Costing\", overhead is a far-ranging component of complete product costs. This describes the require for a refined overhead allocation system such as activity-based costing.


Comparison of abc to Plantwide Costing in ~ SailRite

After going with the procedure of allocating overhead utilizing activity-based costing, man Lester (the agency accountant) dubbed a meeting v the same management group introduced at the start of the chapter: Cindy room (CEO), mar McCann (vice president of marketing), and also Bob Schuler (vice president of production). As you read the adhering to dialogue, refer to figure 3.7 \"Activity-Based Costing versus Plantwide Costing in ~ SailRite Company\", i m sorry summarizes John’s findings.


Cindy: What carry out you have actually for us, John?
John: I think you’ll find the results of our many recent costing analysis really interesting. Us used method called activity-based costing come allocate overhead come products.
Bob: I recall gift interviewed last week around the activities involved in the production process.
John: Yes, here’s what us found. The old allocation approach indicates that the simple boat costs $2,880 to build and the Deluxe watercraft costs $3,650 come build. Our mean sales price for the an easy is $3,200 and also $4,500 for the Deluxe. You have the right to see why we propelled sales the the deluxe boat—it has a profit of $850 every boat.
Cindy: John, from your analysis, that looks as if us were wrong about the Deluxe watercraft being the most profitable.
John: We do have actually some frighten results. Making use of activity-based costing, strategy I think is much much more accurate, the Deluxe boat is not rewarding at all. In fact, we lose $530 for each Deluxe boat sold, and the earnings from the straightforward boat are much higher than we thought at $596 every unit.
Cindy: I see straight materials and also direct labor room the very same no matter which costing system we use. Why is there together a huge variation in overhead costs?
John: Good question! as soon as we provided our old strategy of one plantwide rate based upon direct job hours, the Deluxe process consumed 20 percent that all straight labor hrs worked—that is, 50,000 deluxe hours separated by 250,000 full hours. Thus the Deluxe version was allocated 20 percent of every overhead costs. Using activity-based costing, we determined five vital activities and assigned overhead costs based on the use of these activities. The Deluxe procedure consumed much more than 20 percent that the resources noted for every activity. Because that example, running machines is just one of the many costly activities, and the Deluxe version used around 44 percent that the resources noted by this activity. This is significantly greater than the 20 percent allocated using direct labor hrs under the old approach.
Bob: This definitely makes sense! each Deluxe boat takes a entirety lot more maker hours to produce than the simple boat.
Cindy: Thanks for this analysis, John. Currently we recognize why firm profits have been declining even though sales have increased. Either the deluxe sales price have to go increase or costs must walk down—or a mix of both!

Figure 3.7 Activity-Based Costing versus Plantwide Costing in ~ SailRite Company

*From number 3.2 \"SailRite agency Product costs Using One Plantwide Rate based on Direct labor Hours\".

**From number 3.5 \"Allocation that Overhead expenses to assets at SailRite Company\".


Question: SailRite has more accurate product cost information making use of activity-based costing come allocate overhead. Why is the overhead price per unit so various using activity-based costing?

 

Answer: number 3.8 \"Detailed evaluation of Overhead Allocations at SailRite Company\" offers a much more thorough look at at exactly how the luxurious product consumes a significant share the overhead resources—much greater than the 20 percent the was gift allocated based upon direct labor hours. Let’s look at figure 3.8 \"Detailed evaluation of Overhead Allocations in ~ SailRite Company\" in detail:

The DLH (direct job hours) pillar represents overhead prices allocated using direct labor hrs as the assignment base whereby 80 percent to be allocated to the simple boat (= 200,000 hrs ÷ 250,000 full hours) and 20 percent allocated to the Deluxe watercraft (= 50,000 hours ÷ 250,000 total hours). The Diff. (difference) shaft shows the difference between one allocation an approach and the other. Notice the change in the allocation that overhead costs using activity-based costing. A full of $1,380,000 in overhead prices shifts come the deluxe sailboat, which amounts to $1,380 per boat (= $1,380,000 ÷ 1,000 boats).

Figure 3.8 Detailed analysis of Overhead Allocations in ~ SailRite Company

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*Amounts in this column come from figure 3.5 \"Allocation the Overhead costs to assets at SailRite Company\".

**Amounts in this shaft are calculation by multiply 80 percent because that the simple boat (20 percent for the Deluxe) by the complete overhead cost for the activity. For example, the complete overhead cost for purchasing products is $1,200,000 (see number 3.4 \"Predetermined Overhead rates for SailRite Company\") and also $1,200,000 × 80 percent = $960,000. Using the plantwide strategy (one plantwide rate based on direct labor hours), $960,000 is the amount allocated to the basic sailboat for this activity, and $240,000 is the lot allocated come the deluxe boat.


The major reason that using activity-based costing shifted overhead expenses to the deluxe sailboat is that producing each Deluxe watercraft requires an ext resources than the simple boat. For example, the basic boat calls for 50,000 maker hours to create 5,000 boats, and also the Deluxe boat requires 40,000 device hours to produce 1,000 boats. The number of machine hours required per watercraft produced is together follows:


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You deserve to see native this analysis that the Deluxe watercraft consumes four times the maker hours of the an easy boat. At a rate of $30 per machine hour, the Deluxe watercraft is assigned $1,200 per boat for this task ($30 price × 40 maker hours) when the simple boat is assigned $300 per boat ($30 price × 10 an equipment hours).


Advantages and Disadvantages that ABC

Question: Activity-based costing undoubtedly provides better cost info than most traditional costing methods, such as plantwide and also department allocation methods. However, ABC has actually its limitations. What space the advantages and defect of making use of activity-based costing?

 

Answer: The benefits and disadvantages of ABC are as follows:


Advantages

More accurate expense information leader to far better decisions. The cost information detailed by alphabet is generally regarded as more accurate than the information noted by most traditional costing methods. This permits management to make much better decisions in locations such together product pricing, product line transforms (adding commodities or eliminating products), and also product mix decision (how much of each product come produce and also sell).

Increased knowledge of production activities leads to procedure improvements and also reduced costs. ABC requires identifying the activities involved in the production process (step 1) and assigning expenses to these activities (step 2). This offers management with a better view the the detailed activities involved (purchasing materials, an equipment setups, inspections, and also so forth) and the cost of each activity. Managers are more likely to emphasis on improving performance in the most costly activities, thereby reducing costs.


Disadvantages

ABC systems deserve to be costly to implement. alphabet systems call for teamwork across the organization and also therefore require employees to take time the end from their day-to-day tasks to assist in the ABC procedure (e.g., to determine costly activities). Assigning costs to tasks takes time, as does identifying and tracking expense drivers. And assigning prices to products requires a far-ranging amount the time in the accounting department. Imagine having actually 15 expense pools (activities), each with a predetermined overhead rate used to entrust overhead prices to the that company 80 products—not an unrealistic example for a large company. The accounting costs incurred to maintain such a system can be prohibitively high.

Unitizing fixed expenses can it is in misleading. Product costing requires allocating expenses from activity centers come products and also calculating a product cost per unit. The trouble with this approach is that fixed expenses are frequently a large part that the overhead prices being allocated (e.g., building and also machinery depreciation and also supervisor salaries). Recall that fixed costs are costs that do not adjust in total with changes in activity.

Looking ago to the SailRite example using activity-based costing, the luxurious sailboat cost $5,030 per unit come produce based on production the 1,000 devices (as displayed in figure 3.5 \"Allocation that Overhead prices to commodities at SailRite Company\"). If SailRite produces 2,000 units of the luxurious boat, will the unit cost remain at $5,030? probably not. A far-ranging portion of overhead expenses are fixed and also will be spread out out over an ext units, in order to reducing the expense per unit. We address this worry at length in later on chapters. The allude here is that supervisors must beware of making use of per unit cost information blindly for decision making, specifically if a far-ranging change in the level of manufacturing is anticipated.

The benefits might not outweigh the costs. service providers with one or two commodities that require very small variation in production may not benefit from an abc system. Expect a company produces one product. The overhead expenses can be split into together many price pools as you like, yet all overhead prices will still be assigned to the one product. (We need to mention, however, that monitoring would advantage from expertise the activities involved in the procedure and the costs linked with every activity. The the allocation to the one product—steps 4 and also 5 that ABC—that would certainly provide little useful info in this scenario.)

Companies that develop several different commodities may believe that the services of implementing ABC will outweigh the costs. However, management must be willing to use the ABC details to benefit the company. Companies prefer Chrysler team LLC have been well-known to shot ABC, just to meet resistance from your managers. Until managers are willing to usage the ABC info to make renovations in the organization, over there is no point in implementing together a system.


Business in action 3.1

Characteristics of service providers That use Activity-Based Costing

A inspection of 130 U.S. Manufacturing companies gave in some interesting results. The companies that supplied activity-based costing (ABC) had higher overhead expenses as a percent of full product expenses than carriers that used classic costing. Those making use of ABC additionally had a higher level that automation. The intricacy of manufacturing processes and also products often tended to be higher for those making use of ABC, and ABC service providers operated at capacity more frequently.

It is important to keep in mind that the differences in between companies making use of ABC and also companies using timeless costing solution in all these areas—overhead costs, automation, intricacy of production, and also frequency the capacity—were relatively small. However, individuals of ABC indicated their solution were more adequate than timeless systems in providing useful information for performance evaluation and also cost reduction.


Source: Susan B. Hughes and also Kathy A. Paulson Gjerde, “Do Different expense Systems do a Difference?” Management audit Quarterly, fall 2003.


ABC expense Flows

Question: How room overhead costs recorded when using activity-based costing?

 

Answer: us presented the circulation of expenses for a project costing mechanism in thing 2 \"How Is job Costing supplied to Track production Costs?\", including how to track actual overhead costs and how to track overhead applied using a separate manufacturing overhead account. The cost flows space the same for an activity-based costing system, v one exception. Rather of using one plantwide overhead price to point out (or apply) overhead to products, one ABC mechanism uses numerous overhead rates to point out overhead. The entry to record this allocation—whether it requires one price or lot of rates—is the very same as the entry in thing 2 \"How Is job Costing provided to Track production Costs?\". Merely debit work-in-process inventory and also credit manufacturing overhead for the amount of overhead applied. (Some suppliers use separate work-in-process inventory and manufacturing overhead accounts because that each activity. Because that the services of simplicity, we execute not use different accounts.)

For example, assume production of SailRite’s an easy sailboats has the following price driver activity for one mainly of operations:


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*From figure 3.4 \"Predetermined Overhead prices for SailRite Company\".


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Recall from thing 2 \"How Is project Costing provided to Track manufacturing Costs?\" that the production overhead account is closed to cost of goods sold in ~ the end of the period. If really overhead costs are higher than used overhead, the resulting underapplied overhead is closed v a debit to expense of items sold and a credit to production overhead. If really overhead costs are reduced than applied overhead, the resulting overapplied overhead is closed through a debit to production overhead and a credit transaction to expense of products sold.


Recap of three Allocation Methods

We have debated three various methods of allocation overhead come products—plantwide allocation, room allocation, and also activity-based costing. Remember, complete overhead prices will not change in the short run, however the method total overhead costs are allocated to products will change depending ~ above the method used.

Figure 3.9 \"The Three approaches of Overhead Allocation\" presents the 3 allocation methods, using SailRite together an example. An alert that the 3 pie charts in the illustration are of same size, representing the $8,000,000 complete overhead costs incurred by SailRite.


Figure 3.9 The Three techniques of Overhead Allocation

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Overhead Rates:

1 Allocated based on direct labor hours (DLH):$8,000,000 ÷ 250,000 DLH = $32 every DLH.

2 Allocated based upon direct labor hours (DLH): $5,000,000 ÷ 217,000 DLH = $23 per DLH.

3 Allocated based on machine hours (MH): $3,000,000 ÷ 60,000 MH = $50 per MH.

4 Allocated based upon direct labor hours (DLH): $1,500,000 ÷ 250,000 DLH = $6 every DLH.

5 Allocated based on inspection hours (IH): $1,000,000 ÷ 20,000 IH = $50 per IH.

6 Allocated based on purchase requisitions (PR): $1,200,000 ÷ 10,000 PR = $120 per PR.

7 Allocated based on maker setups (MS): $1,600,000 ÷ 2,000 ms = $800 every MS.

8 Allocated based on machine hours (MH): $2,700,000 ÷ 90,000 MH = $30 every MH.


Key Takeaway

Activity-based costing focuses on identify the activities required to make products, ~ above forming expense pools because that each activity, and also on allocating overhead expenses to the products based on their use of every activity. Abc systems and traditional equipment often an outcome in vastly different product costs. Yet even if the result product prices are not lot different, ABC offers managers with a better understanding the the production activities required because that each activity and the connected costs, which regularly leads to boosted efficiency and reduced costs.

Business in activity 3.2

Using Activity-Based Costing to argue Predatory Pricing

BuyGasCo Corporation, a privately own chain that gas station based in Florida, was taken to court for selling constant grade gasoline below cost, and also an injunction to be issued. Florida regulation prohibits offering gasoline listed below refinery price if doing for this reason injures competition. Making use of a plantwide approach of allocating costs to products, the plaintiff’s costing experienced was maybe to support the allegation the predatory pricing. The defendant’s expert witness, an accounting professor, provided activity-based costing to dispute the allegation.

Both costing professionals had come allocate costs to each of the three qualities of petrol (regular, plus, and also premium) to recognize a total cost per grade the fuel and a cost per gallon because that each grade. Sales of regular grade fuel to be significantly higher (63 percent of total sales) than the other two grades. Making use of the plantwide approach, the plaintiff‘s skilled allocated all costs based on gallons that gas sold. Utilizing the activity-based costing approach, the defendant‘s professional formed three task cost pools—labor, kiosk, and also gas dispensing. The very first two price pools allocated prices using gallons that gas sold and therefore to be allocated as they would certainly be v the plantwide strategy (63 percent for regular grade, 20 percent because that plus, and 17 percent for premium). The third cost swimming pool (gas dispensing) allocated prices equally to each grade of fuel (i.e., one-third of prices to each grade the fuel). The gas dispensing pool consisted of costs for storage tanks, all of which were the very same size, and gas pumps and also signs.

Compared through the plantwide approach, activity-based costing proved a lower price per gallon for continuous gas and also a higher cost per gallon for the other two grades of fuel. When the ABC info was presented, the case was settled, and also the early injunction to be lifted.


Sources: thomas L. Barton and John B. MacArthur, “Activity-Based Costing and also Predatory Pricing: The situation of the Petroleum sleeve Industry,” Management Accounting, spring 2003; all Business, “Home Page,” http://www.allbusiness.com.


Review difficulty 3.3

Parker agency produces one inkjet printer that sells because that $150 and a laser press that sells because that $350. Critical year, total overhead costs of $1,050,000 were allocated based upon direct job hours. A complete of 15,000 straight labor hrs were forced last year to build 12,000 inkjet printers (1.25 hours per unit), and also 10,000 straight labor hrs were required to develop 4,000 laser printers (2.50 hrs per unit). Full direct labor and direct materials prices for the year were as follows:


The monitoring of Parker firm would choose to use activity-based costing to allocate overhead quite than use one plantwide rate based on direct job hours. The following estimates are for the activities and related expense drivers determined as having the greatest affect on overhead costs.


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Required:

calculation the straight materials expense per unit and also direct labor expense per unit because that each product.

 

utilizing the plantwide allocation method, calculation the predetermined overhead rate and determine the overhead cost per unit because that the inkjet and also laser products. What is the price per unit because that the inkjet and laser products?

 

utilizing the activity-based costing assignment method, calculate the predetermined overhead rate for each activity. (Hint: action 1 through step 3 in the activity-based costing process have currently been done for you; this is action 4.) making use of the activity-based costing allocation method, clues overhead to every product. (Hint: This is action 5 in the activity-based costing process.) determine the overhead cost per unit. Round amounts to the nearest dollar. What is the product cost per unit because that the inkjet and also laser products? calculate the every unit benefit for each product utilizing the plantwide approach and the activity-based costing approach. Discuss the differences in between the results of the two approaches.

Solutions to Review problem 3.3

The price per unit for direct materials is as follows:


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The plantwide allocation provided by Parker agency is based upon direct job hours. The predetermined overhead rate is calculated as follows:

Estimated overhead costEstimated activity in allocation base=$1,050,00025,000 hours=$42 per direct labor hour

Because the inkjet printer calls for 1.25 straight labor hours to build and the laser press takes 2.50 direct labor hours to construct (both numbers are provided in the difficulty data), $52.50 in overhead is allocated to 1 unit the the inkjet product (= $42 price × 1.25 hours) and $105 in overhead is allocated to 1 unit that the laser product ($42 price × 2.50 direct labor hours).

Per unit product costs are together follows:


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Direct materials and also direct labor determined from inquiry 1.

*$52.50 = 1.25 direct labor hours per unit × $42 rate.

**$105 = 2.50 direct labor hrs per unit × $42 rate.


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*Overhead allocated equals the predetermined overhead rate times the price driver activity.

**Overhead cost per unit because that the inkjet printer equals $695,000 (overhead allocated) ÷ 12,000 units produced, and also for the laser printer, $355,000 ÷ 4,000 devices produced. Amounts are rounded come the nearest dollar.


Although unit product prices do not adjust significantly because that the inkjet printer once activity-based costing is provided (from $147.50 to $153), the expense increases enough to an outcome in a $3 loss for each unit. Conversely, the laser printer expenses decrease substantially from $285 to $269 every unit when using activity-based costing, causing a profit of $81 every unit.

See more: Suppose That A Country Increased Its Saving Rate. In The Long Run It Would Have

The transition in overhead expenses to the inkjet printer is mainly a an outcome of the inkjet printer utilizing 80 percent of the production run resources and thus being assigned 80 percent of the overhead costs connected with manufacturing runs. The plantwide rate strategy only assigned 60 percent of every overhead costs to the inkjet printer, including those connected to production runs (60 percent = 15,000 inkjet direct labor hours ÷ 25,000 complete direct job hours).