Traditional Costing versus ABC

Traditional Costing versus ABC - Boot is a high-volume item...

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Example of Traditional Costing versus ABC In this section we present a simple case example that compares traditional costing and activity-based  costing. It illustrates how ABC eliminates the distortion that can occur in traditional overhead cost  allocation. As you study this example, you should understand that ABC does not  replace  an existing  job order or process costing system. What ABC does is to segregate overhead into various cost pools  in an effort to provide more accurate cost information. As a result, ABC supplements—not replaces —the traditional cost systems. Assume that Atlas Company produces two automobile antitheft devices, The Boot and The Club. The 
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Unformatted text preview: Boot is a high-volume item totaling 25,000 units annually. The Club is a low-volume item totaling only 5,000 units per year. Each product requires one hour of direct labor for completion. Therefore, total annual direct labor hours are 30,000 (25,000 + 5,000). Expected annual manufacturing overhead costs are $900,000. Thus, the predetermined overhead rate is $30 ($900,000 ÷ 30,000) per direct labor hour. The direct materials cost per unit is $40 for The Boot and $30 for The Club. The direct labor cost is $12 per unit for each product....
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