d. P205.00.b. P 44.65.V. ProblemsProblem 1Peejay Autoparts, Inc., previously used a cost system that allocated allfactory overhead costs to products based on 350 percent of direct labor cost.The company has just implemented an ABC system that traces indirect coststo products based on consumption of major activities as indicated below.Compare the total annual costs of Product X using both the traditionalvolume-based and the new ABC systems.Product X CostAnnual Cost DriverDriver ConsumptionCostQиantityActivityP10,000P 30,000P300,000Labor800 hoursP500,000Machining20,000 hours100 hoursP100,00010,000 hoursSetupP200,00012 orders2,000 ordersProduction orderP 20,0005 requisitions1,000 requisitionsMaterial handling18 partsP480,00012,000 partsParts administration

Question
Asked Nov 7, 2019
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d. P205.00.
b. P 44.65.
V. Problems
Problem 1
Peejay Autoparts, Inc., previously used a cost system that allocated all
factory overhead costs to products based on 350 percent of direct labor cost.
The company has just implemented an ABC system that traces indirect costs
to products based on consumption of major activities as indicated below.
Compare the total annual costs of Product X using both the traditional
volume-based and the new ABC systems.
Product X Cost
Annual Cost Driver
Driver Consumption
Cost
Qиantity
Activity
P10,000
P 30,000
P300,000
Labor
800 hours
P500,000
Machining
20,000 hours
100 hours
P100,000
10,000 hours
Setup
P200,000
12 orders
2,000 orders
Production order
P 20,000
5 requisitions
1,000 requisitions
Material handling
18 parts
P480,000
12,000 parts
Parts administration
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d. P205.00. b. P 44.65. V. Problems Problem 1 Peejay Autoparts, Inc., previously used a cost system that allocated all factory overhead costs to products based on 350 percent of direct labor cost. The company has just implemented an ABC system that traces indirect costs to products based on consumption of major activities as indicated below. Compare the total annual costs of Product X using both the traditional volume-based and the new ABC systems. Product X Cost Annual Cost Driver Driver Consumption Cost Qиantity Activity P10,000 P 30,000 P300,000 Labor 800 hours P500,000 Machining 20,000 hours 100 hours P100,000 10,000 hours Setup P200,000 12 orders 2,000 orders Production order P 20,000 5 requisitions 1,000 requisitions Material handling 18 parts P480,000 12,000 parts Parts administration

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Expert Answer

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Step 1

In the traditional costing, overhead costs may be allocated to a product based on certain percentage of direct labor , machine hours etc. However in Activity Based Costing, each overhead cost may be allocated based on activity consumption out of total activity and hence usually provides more accurate costings of the product.

Step 2

As per traditional costing, based on 350% overhead allocation, the cost of the prouct including Direct labor and overhead costs would be 

 Costs
LaborP10,000
Overhead (350%)P35,000
TotalP45,000
Step 3
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Costing as per Activity Based Costing Cost/Annual Product X Product X Annual Cost Driver consumption cost (e) Cost Driver Cost (b) d(b/c) Activity Quantity (a) (d*e) 10,000 20,000 1,000 1,200 Labor Machining (hrs) Setup Production order Material handling Parts administration 25 20000 500000 800 10,000 100,000 10 100 2000 200000 100 12 20,000 1000 20 5 100 12000 480000 40 18 720 Total 33,020

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