Author Question: Assume a traditional costing system applies the 160,000 of overhead costs based on direct labor ... (Read 121 times)

amal · **on:** Jul 5, 2018

Assume a traditional costing system applies the 160,000 of overhead costs based on direct labor hours.

Rachel's Pet Supply Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:

Number of Number of Number of
Product Setups Components Direct Labor Hours
Standard 3 30 650
Deluxe 7 50 150

Overhead costs 40,000 120,000

a. What is the total amount of overhead costs assigned to the standard model?
b. What is the total amount of overhead costs assigned to the deluxe model?

Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead.
c. What is the total amount of overhead costs assigned to the standard model?
d. What is the total amount of overhead costs assigned to the deluxe model?
e. Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why?

Question 2

Given this change in the cost structure ________.

A) The costing results for chess pieces under the new system depend on the adequacy and quality of the estimated cost drivers and costs used by the system.
B) Chess pieces have benefited from the new system.
C) Chess pieces are definitely more accurately costed.
D) Chess will now have a lower sales price.

momolu · **Reply #1 on:** Jul 5, 2018

Answer to Question 1

Answer:
a. 160,000 / (650 + 150) 650 = 130,000

b. 160,000 / (650 + 150) 150 = 30,000

c. Setups: 40,000 / (3 + 7) = 4,000
Components: 120,000 / (30 + 50) = 1,500
(4,000 3) + (1,500 30) = 57,000

d. (4,000 7) + (1,500 50) = 103,000

e. Because the products do not all require the same proportionate shares of the overhead resources of setup hours and components, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the costs from each grooming table style, provided that the activity measures are fairly estimated.

Answer to Question 2

Answer: A