COST ACCOUNTING QUESTION Activity-based costing. The job costing system at Sheri
ID: 2423379 • Letter: C
Question
COST ACCOUNTING QUESTION
Activity-based costing. The job costing system at Sheri's Custom Framing has five indirect cost pools (purchasing, material handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs: Job 215, an order of 15 intricate personalized frames, and Job 325, an order of 6 standard personalized frames. The controller wants you to compare overhead allocated under the current simple job-costing system and a newly designed activity-based job-costing system. Total budgeted costs in each indirect cost pool and the budgeted quantity of activity driver are as follows. Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 325. Compute the total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine-hours. Compute the total overhead allocated to each job under an activity-based costing system using the appropriate activity drivers. Explain why Sheri's Custom Framing might favor the ABC job-costing system over the simple job-costing system, especially in its bidding process.Explanation / Answer
1). Simple costing system:
Over head per machine hour = 226800 / 10500 = $21.60 per hour
Calculation of total OH allocated to each job: = Machine hours * OH per machine hour.
JOB215 JOB325
= 40 * 21.60 = 60 * 21.60
= 864 = 1296
2).
Calculatuion of Activity OH per Activity quantity
= Activity OH / Quantity of activity OH
Purchasing : 35000 / 2000 = $17.50
Material handling : 43750 / 5000 = $8.75
Machine maintanance: 118650 / 10500 = $11.30
Product incepection: 9450 / 1200 = $7.875
Packing: 19950 / 3800 = $5.25
Computation of OH allocated to each job using Activity based costing:
OH allocated to job = Quantity of OH consumed * Activity OH per Activity quantity
JOB215 JOB325
Purchasing OH :
(25 * 17.50) 437.50
(8 * 17.50) 140
Material handling : (similar to above) 87.50 35
Machine maintanance: machine hours @ $11.30 452 678
Product incepection:No. of inspections @$7.875 70.875 23.62
Packing: Units produced @$5.25 78.75 31.50
Total OH Allocated 1126.62 $768.12
3).
Activity-based costing is more accurate because it takes important factors into account before assigning a cost to a product.Activity-based costing provides a more accurate view of product cost because it divides costs based on diffrent activities.
But in traditional costing system normally there is only one criteria(eg: machine hours,) to divide total overheads. It does not shows accurate costing always .As in above question JOB215 allocated less total overheads because it incurrs less number of machine hours. But when we calculate using Activity based costing we came to know due to other activities it incurred more overheads, So Activity costing is more preferable.
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