36 Compare and also Contrast Traditional and Activity-Based Costing Systems

Calculating precise manufacturing price for every product is a critical piece of info for a company’s decision-making. Because that example, discovering the price to develop a unit the product affects no only just how a organization budgets come manufacture the product, but it is often the beginning point in identify the sales price.

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An vital component in determining the full production prices of a product or job is the suitable allocation that overhead. For some companies, the frequently less-complicated traditional method does great job of allocation overhead. However, for numerous products, the allocation the overhead is a more complex issue, and also an activity-based costing (ABC) system is an ext appropriate.

Another factor to think about in identify which of the two significant overhead allocation techniques to use is the cost connected with collecting and assessing information. Once making their decision concerning which method to use, the agency must take into consideration these costs, both in time and also money. (Figure) to compare overhead in the two systems. In many cases, the ABC method is much more expensive in terms of time and also other costs.

The difference in between the traditional an approach (using one expense driver) and the ABC technique (using multiple expense drivers) is more facility than simply the number of cost drivers. When straight labor is a big portion of the product cost, the overhead expenses tend to be consistently moved by one cost driver, which is commonly direct labor or device hours; the traditional method appropriately allocates those costs. When an innovation is a big portion that the product cost, the overhead costs tend come be pushed by multiple drivers, so utilizing multiple price drivers in the ABC method allows for a more precise allocation of overhead.

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Overhead in traditional versus alphabet Costing TraditionalABC
Overhead assignedSingle expense driverMultiple cost drivers
Optimal usageWhen straight labor is a huge portion of the product costWhen an innovation is a huge portion of the product cost
OrientationCost drivenProcess driven

As shown with Musicality’s products, not only are over there different expenses for every product as soon as comparing timeless allocation with an activity-based costing, but ABC verified that the Solo product creates a loss for the company. Activity-based costing is a an ext accurate method, because it assigns overhead based upon the tasks that journey the overhead costs. It deserve to be concluded, then, that the cost and also subsequent gun loss for each unit’s sales provide a more accurate snapshot than the overall cost and gross profit under the classic method. (Figure) compare the price per unit using the different price systems and shows how various the prices can be relying on the an approach used.

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How much overhead would be allocated to every unit under the timeless allocation method?How much overhead would be allocated to each unit under activity-based costing?

(Figure)Carlton’s Kitchens makes two species of pasta makers: Strands and Shapes. The agency expects to manufacture 70,000 devices of Strands, which has actually a per-unit direct material cost of $10 and a per-unit direct labor price of $60. It additionally expects come manufacture 30,000 devices of Shapes, which has a per-unit material expense of $15 and a per-unit direct labor expense of $40. The is estimated that Strands will use 140,000 an equipment hours and also Shapes will need 60,000 an equipment hours. Historically, the agency has offered the classic allocation method and used overhead in ~ a price of $21 per maker hour. That was identified that there were three expense pools, and also the overhead for each cost pool is shown:

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What is the per-unit cost for every product under the timeless allocation method?What is the per-unit price for each product under alphabet costing?Compared to abc costing, was each product’s overhead under- or overapplied?How much was overhead under- or overapplied because that each product?

(Figure)Carlton’s Kitchen’s three cost pools and also overhead estimates are as follows:

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The approximated overhead because that the material price pool is approximated as $12,500, and the estimate for the device setup swimming pool is $35,000. Calculation the allocation rate per unit of brass and also per unit of yellow using:

The timeless allocation methodThe activity-based costing method

(Figure)Portable Seats provides two chairs: folding and also wooden. This info was derived to evaluation the decision to think about ABC:

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How lot overhead would certainly be assigned to each unit under the classic allocation method?How much overhead would certainly be assigned to every unit under activity-based costing?

(Figure)Casey’s Kitchens provides two types of food smokers: Gas and Electric. The company expects come manufacture 20,000 devices of Gas smokers, which have a per-unit straight material cost of $15 and a per-unit direct labor cost of $25. It also expects come manufacture 50,000 devices of electrical smokers, which have a per-unit material expense of $20 and a per-unit direct labor price of $45. Historically, it has actually used the classic allocation an approach and applied overhead in ~ a price of $125 per maker hour. It was determined that there were three price pools, and the overhead for each expense pool is as follows:

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What is the per-unit expense for every product under the traditional allocation method?What is the per-unit price for every product under abc costing?

(Figure)Casey’s Kitchens’ three price pools and also overhead approximates are as follows:

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The estimated overhead because that the material cost pool is estimated as $45,000, and the calculation for the device setup swimming pool is $55,000. Calculation the allocation rate per unit that silver and also per unit of yellow using:

The timeless allocation methodThe activity-based costing method

(Figure)Portable Seats provides two chairs: folding and wooden. This info was derived to testimonial the decision to consider ABC:

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Compute the overhead assigned to each product under:

The traditional allocation methodThe activity-based costing method

(Figure)Cape ko Adventures makes foam noodles v sales of 3,000,000 devices per year and also retractable boat oars with sales the 50,000 pairs per year. What details would Cape ko Adventures require in order to change from timeless to alphabet costing? What space the limitations to activity-based costing?