Process Costing and Traditional vs. Activity Based Costing Overhead Allocation Systems
High-End Lifts has added three stair-lift systems for use in residential homes, small businesses and office facilities. The lift systems
are produced on a continuous basis, rather than custom, made-to-order units like the residential elevators. Three models are
planned for production: Economy, Premium and Lite Commercial.
New space has been acquired and each product line has its own
designated floor space for production runs. Although a job-order costing system could be utilized to track individual orders, a
process costing system is appropriate for tracking continuous flow, multiple WIP, accounts. They've asked for your help in
establishing a process costing system for tracking manufacturing costs. They've requested that you explain how to prepare a
product-line production report
for each model.
In addition to learning a new type of accounting system, they'd like
you to advise them on choosing between a traditional volume-
based overhead application system (based on direct-labor hours) ) and an activity-based costing (ABC) allocation system which
assigns the overhead costs to activity cost pools and determines the cost drivers appropriate for each pool. They are looking for
your guidance in selecting the right approach.
Skylar Cab, the CEO, has asked you to meet with each Product-Line Sales Manager before meeting with him to get their feedback on
the ABC costing results. You have a lot of work to do before meeting with each Sales Manager. Let's get started:
Read the information in the Challenge 3 Workbook (found in “Resources”) to prepare for the challenge
assignment. Watch the videos to gain a stronger understanding of the concepts.
: Calculate the predetermined MOH application rate using direct labor hours as the cost driver.
(Follow the direction for Task
#1 by completing the yellow highlighted area.)
: Create the
Product-Line Production Reports
(PLPR) for the Economy, Premium and Lite-Commercial Models. (Follow the
directions for completing Task #2, PLPR Reports by completing the yellow highlighted areas.)
: Calculate the MOH applied to each product line using activity-based costing. Use the consumption ratios provided
Task #4 tab for allocating the costs to the four cost pools.
(Follow the directions for completing Task #3, ABC, in the tab that follows
by completing the yellow highlighted areas.)
: Determine the difference in the costs and prices for each product line using the traditional, volume-based approach and the
activity-based costing approach to overhead application.
Consider the following questions:
: If the company switches to ABC overhead allocation, will the Economy line be more competitive in the marketplace
or less competitive?