Cocoa Pet Corporation manufactures two models of grooming stations, a standard and a deluxe model. The following activity and cost information has been compiled:
Number ofNumber ofNumber of
ProductSetupsComponentsDirect Labor Hours
Assume a traditional costing system applies the $80,000 of overhead costs based on direct labor hours. a.What is the total amount of overhead costs assigned to the standard model? b.What is the total amount of overhead costs assigned to the deluxe model?
Assume an activity-based costing system is used and that the number of setups and the number of components are identified as the activity-cost drivers for overhead. c.What is the total amount of overhead costs assigned to the standard model? d.What is the total amount of overhead costs assigned to the deluxe model? e.Explain the difference between the costs obtained from the traditional costing system and the ABC system. Which system provides a better estimate of costs? Why? Answer:
a.[$80,000 / (650 + 150)] × 650 = $65,000
b.[$80,000 / (650 + 150)] × 150 = $15,000
c.Setups: $20,000 / (3 + 7) = $2,000
Components: $60,000 / (30 + 50) = $750
($2,000 × 3) + ($750 × 30) = $28,500
d.($2,000 × 7) + ($750 × 50) = $51,500
e.Because the products do not all require the same proportionate shares of the overhead resources of setup hours and components, the ABC system provides different results than the traditional system which allocates overhead costs on the basis of direct labor hours. The ABC system considers some important differences in overhead resource requirements and thus provides a better picture of the costs from each grooming table style, provided that the activity measures are fairly estimated.