4.41 - Activity-based costing is more accurate It allocates the individual components of our overhead to our products based upon the product’s

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4.41 (45 min) Limitations of traditional costing methods c. Description Unleaded Low-Lead High-Lead Total Direct materials $13,000 $8,000 $ 5,000 $26,000 Direct labor 2,250 2,250 3,000 7,500 Indirect Costs Order proc. 800 a 600 400 1,800 Prod. setup 2,000 b 2,000 4,000 8,000 Mat. handling 6,250 c 2,500 1,250 10,000 Mach. dep. 5,800 d 1,400 800 8,000 Quality con. 500 e 500 500 1,500 Packing 2,500 f 1,000 375 3,875 Total Cost $33,100 $18,250 $15,325 $66,675 _______________ a $800 = $200 per order x 4 orders b $2,000 = $2,000 per run x 1 run c $6,250 = $1.25 per pound x 5,000 pounds d $5,800 = $10 per machine hour x 580 hours e $500 = $500 per inspections x 1 inspection f $2,500 = $0.125 per unit x 20,000 units
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4.41 (continued) d. The discrepancy between our product costs using direct- labor hours as the allocation base versus activity-based costing is found in the way overhead costs are allocated. Our traditional direct-labor cost method distorts our product costs because there is little correlation between our direct-labor costs and overhead.
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Unformatted text preview: Activity-based costing is more accurate. It allocates the individual components of our overhead to our products based upon the product’s use of that overhead component. With the more accurate product costs, we should begin to concentrate our efforts upon reducing the costs of our more expensive overhead operations. As seen in the activity-based costing report, a large share of our total overhead is comprised of materials handling and production setup costs – costs which were not visible under the direct-labor approach. Reducing our materials handling and production setup costs should be a new priority. We recommend assessing the cost of using an activity-based system in our company. We will proceed with activity-based costing if we find the cost of the new system is less than the benefits of the more accurate information we will receive....
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This note was uploaded on 11/25/2010 for the course ACCT 33010 taught by Professor Staff during the Spring '08 term at Kent State.

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4.41 - Activity-based costing is more accurate It allocates the individual components of our overhead to our products based upon the product’s

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