costacctg13_sm_ch05

3 duvals co mments about abc implementation are valid

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Unformatted text preview: areas, and b. the act ivit y areas differ in their indirect cost allocation bases (specifically, each area does not use the direct manufacturing labor­hours indirect cost allocation base). 5-44 The fo llowing table documents how the two job orders differ in the way they use each of the five activit y areas included in indirect manufacturing costs: Usage Based on Analysis of Usage Assumed with Direct Manuf. Activity Area Cost Drivers Labor­Hours as Application Base Job Order Job Order Job Order Job Order 410 411 410 411 20.0% 80.0% 6.25% 93.75% 25.0 75.0 6.25 93.75 12.5 87.5 6.25 93.75 20.0 80.0 6.25 93.75 4.8 95.2 6.25 93.75 Activity Area Materials handling Lathe work Milling Grinding Testing The differences in product cost figures might be important to Tracy Corporation for product pricing and product emphasis decisio ns. The act ivit y­based account ing approach indicates that job order 410 is being undercosted while jo b order 411 is being overcosted. Tracy Corporation may erroneously push job order 410 and deemphasize jo b order 411. Moreover, by its act ions, Tracy Corporation may encourage a compet itor to enter the market for job order 411 and take market share...
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