rs are the allocation base. Carter is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,000,000 across three activities: Design, Production, and Inspection. Under the traditional volume-based costi
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.
Carter, Inc. produces two different products, Product A and Product B. Carter uses a traditional volume-based costing system in which direct labor hours are the allocation base. Carter is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,000,000 across three activities: Design, Production, and Inspection. Under the traditional volume-based costing system, the predetermined overhead rate is $2.50/direct labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows:
| Activity Rate | Usage by Product A | Usage by Product B | |||||||
| Design (Engineering Hours) | $ | 600 | /hour | 200 | 300 | ||||
| Production (Direct Labor Hours) | $ | 1.25 | 100,000 | 300,000 | |||||
| Inspection (Batches) | $ | 500 | 300 | 100 | |||||
Required:
a. Calculate the indirect
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system.
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?
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Indirect manufacturing costs:
Indirect manufacturing costs are also known as manufacturing overhead which is incurred indirectly for producing the products. They are two methods to calculate the indirect manufacturing costs, the traditional method, and activity-based costing.
Traditional method:
Under this method, the manufacturing overhead is allocated on the basis of a single activity, known as the pre-determined overhead rate.
Activity-based costing:
Under this method, the manufacturing overhead is allocated on the basis of various activities it goes through in the production process.
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