This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
Unformatted text preview: get allocated to the complex product, since its use of direct labor may be less. The actual usage of resources has no relation to the direct labor. In this case, when the company started producing LiteMist, the overhead costs increased significantly since LiteMist required complex procedures, it being sold in 1-liter bottles. Since the allocation base was direct labor, CoolDay as apportioned a higher proportion of costs and therefore the profitability of CoolDay declined. As can be seen, the traditional approach gave the cost of CoolDay as $1.078 where it came to $0.891 in ABC costing. It is my opinion the company should rethink its plans of stopping the production of CoolDay. Memo I hope that you find the above explanation satisfactory in regard to the information provided in the analysis. Contact me should you have any other questions or concerns. Thank you....
View Full Document
- Spring '08
- Accounting, traditional costing systems, CoolDay