Ole Company manufactures two products, Product A and Product B. Currently, machine hours are used to allocate the overhead costs to the two products. Ole Company is considering adopting an activity-based costing system. If so, overhead costs will be traced to the following activities: Activities Machining Quality Control Material Moves Activity cost pools $300,000 $200,000 $400,000 Cost Drivers Machine Hours Number of inspections Number of moves Product A 30,000 400 2,000 Product B 20,000 600 6,000 (a) Calculate the total overhead cost assigned to Product A under the current system. (b) Calculate the total overhead cost for Product A if the company implements activity-based costing system. (c) Briefly explain which costing method gives a more accurate picture of the costs. (d) Suppose you are the management accountant in a university. List any three (3)activities commonly carried out in universities and identify an appropriate cost driver for each activity.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Ole Company manufactures two products, Product A and Product B. Currently, machine
hours are used to allocate the overhead costs to the two products.
Ole Company is considering adopting an activity-based costing system. If so, overhead
costs will be traced to the following activities:
Activities Machining Quality Control Material Moves
Activity cost pools $300,000 $200,000 $400,000
Cost Drivers Machine Hours Number of inspections Number of moves
Product A 30,000 400 2,000
Product B 20,000 600 6,000
(a) Calculate the total overhead cost assigned to Product A under the current system.
(b) Calculate the total overhead cost for Product A if the company implements
activity-based costing system.
(c) Briefly explain which costing method gives a more accurate picture of the costs.
(d) Suppose you are the
driver for each activity.
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