What is the difference in the cost of Widget B, per product, using a traditional
ID: 2485362 • Letter: W
Question
What is the difference in the cost of Widget B, per product, using a traditional labor allocation vs. activity based costing method, assuming the three main cost activities are:
> Direct Labor
> Machine Hours
> # of Purchase Orders
General Ledger
Payroll taxes
$1,700
Machine maintenance
$750
Purchasing Dept. labor
$3,500
Fringe benefits
$1,500
Purchasing Dept. Supplies
$300
Equipment depreciation
$1000
Electricity
$1500
Unemployment insurance
$1,300
The traditional method UNDER counts the cost by $475 per unit
The traditional method OVER counts the cost by $475 per unit
The traditional method UNDER counts the cost by $380 per unit
The traditional method OVER counts the cost by $380 per unit
$1,300
What is the difference in the cost of Widget B, per product, using a traditional labor allocation vs. activity based costing method, assuming the three main cost activities are:
> Direct Labor
> Machine Hours
> # of Purchase Orders
Assume the following bases & General Ledger Data: Direct labor hours = 1000 Machine hours = 250 Purchase orders = 100 Widget A Widget B Total Direct labor hours = 400 600 1000 Machine hours = 100 150 250 Purchase orders = 50 50 100General Ledger
Payroll taxes
$1,700
Machine maintenance
$750
Purchasing Dept. labor
$3,500
Fringe benefits
$1,500
Purchasing Dept. Supplies
$300
Equipment depreciation
$1000
Electricity
$1500
Unemployment insurance
$1,300
A.The traditional method UNDER counts the cost by $475 per unit
B.The traditional method OVER counts the cost by $475 per unit
C.The traditional method UNDER counts the cost by $380 per unit
D.The traditional method OVER counts the cost by $380 per unit
$1,300
Explanation / Answer
Direct labor
Machine hours
Purchase order
Payroll taxes
1,700
Machine hours
750
Purchasing Dept labor
3,500
Fringe benefits
1,500
Purchasing Dept. Supplies
300
Equipment depreciation
1,000
Electricity
1,500
Unemployed insurance
1,300
total
4,500
3,250
3,800
Calculation for Widget B under ABC
Direct labor = 4,500/1000*600 = $2,700
Machine hours = 3,250/250*150 = $1,950
Purchase order = 3,800/100*50 =$ 1,900
Total overhead for widget B =$6,550
Under Traditional costing = total overhead/direct labor hours * widget B DLH
=11,550/1,000*600
=$6,930
So under traditional over applied by 6,930 – 6,550 = $380
Option D The traditional method OVER counts the cost by $380 per unit
Direct labor
Machine hours
Purchase order
Payroll taxes
1,700
Machine hours
750
Purchasing Dept labor
3,500
Fringe benefits
1,500
Purchasing Dept. Supplies
300
Equipment depreciation
1,000
Electricity
1,500
Unemployed insurance
1,300
total
4,500
3,250
3,800
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