Axis Systems specializes in servers for work-group, e-commerce and ERP applications. The company’s original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of $22 per direct labor hour. The CFO recently spear headed the allocation issue of jobs and came up with an ABC system to compare to the traditional accounting system. Axis System has been awarded two new contracts that will be produced as Job A and Job B. Which Accounting System should Axis use in order to best price their products?
ANALYSIS AND OPTIONS:
Axis has two options for its accounting system. The first one is the traditional way, which is allocated by direct materials and direct labor and an MOH of $22. Shown by Exhibit 2. The traditional method best allocates smaller jobs, where it’s not as accurate allocating larger jobs. The second option is activity based costing, which is demonstrated in Exhibit 1. The advantage to the ABC system is shown in Job 1, which best allocates larger jobs and not as accurate allocating smaller jobs. Our third option, is to outsource one of the two jobs or both jobs but to this decision will be made when the CFO has decided to stick with either the traditional method of accounting or the ABC system of accounting.
I recommend that Axis Systems take option 2, which is the best way to allocate their jobs. Although job 2 may be more expensive in the ABC system, Axis has the option to outsource job 2 and allocate less materials and direct labor to produce. This will help Axis’s bottom line later. (Shown in Exhibit 3)
Job A| | Job B|
Number of Parts| $12,750| | Number of Parts| $1,700|
Number Setups| $3,000| | Number Setups| $2,000|
Number Assembly Hours| $120,000| | Number Assembly Hours| $16,000| Number Shipping| $1,500| |...