Traditional Product Costing versus Activity Based Costing Assume that Panasonic
ID: 2651821 • Letter: T
Question
Traditional Product Costing versus Activity Based Costing
Assume that Panasonic Company has determined its estimated total manufacturing overhead cost for one of its plants to be $204,000 consisting of the following activity cost pools for the month.
Activity Center Activity Costs Cost Driver Activity Level
Assembly setup $45,000 Setup hours 1,500
Material Handling 15,000 Number of moves 300
Assembly 120,000 Assembly hours 12,000
Maintenance 24,000 Maintenance hours 1,200
Total $204,000
Total direct labor hours used during the month were 8,000. Panasonic produced many different electronic products, including the following two products produced during the current month:
Model x301 Modelz205
Units produced 1,000 1,000
Direct material cost $15,000 $15,000
Direct Labor Cost $12,500 $12,500
Direct Labor hours 500 500
Setup hours 50 100
Material moves 25 50
Assembly hours 800 800
Maintenance hours 10 40
a. Calculate the total cost per-unit cost of each model using direct labor hours to assign manufacturing overhead to products.
b. Calculate the total per-unit cost of each model using activity-based costing to assign manufacturing overhead to products.
c. Comment on the accuracy of the two methods for determining costs.
d. Discuss some of the strategic implications of your answers to the previous requirements.
Explanation / Answer
a Total Cost per unit using direct labour hours
Direct material = Total Material Cost/ No of units = 15000/1000 = $ 15
Direct Labour = Total Labour Cost/No of Units = 12500/1000 = 12.5
Overheads Cost =204000/8000*500 = 12750/1000 = 12.75
Total Cost= Direct material+ Direct Labour+ Overheads = 15+12.5+12.75 = $ 40.25
b. Total per unit cost using activity based costing
Overheads Setup = 45000/1500*50 = 1500
material Handling =15000/300*25 = 1250
Assembly =120000/12000*800 = 8000
maintenance = 24000/1200*10 = 200
Total = 10950/1000= 10.95
Total per unit cost = 15+125+12.75 = $ 40.25
Activity Based Costing Method is more accurate than traditional methods as overhead cost can be assigned to the product more specifically.
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