I hope this is enough information, but I am seeking a professional opinion on which costing system would work best based on the information below. This is a two question request.
Cost pool Costs Product C Product D Total
Machine set-up $13,630 130 160 290
Purchase orders $85,750 750 1,000 1,750
General factory $67,760 4,000 2,160 6,160
Unit cost $43.43 $29.73
You are a product manager for product D and are evaluated based on product profitability, which method (activity based costing or the traditional system based on direct labor hours) would you prefer?
Question 2: The government wants to buy product C and will pay for the cost of the product plus a fixed fee. Should you adopt the ABC system or keep the old plant wide overhead system and why?
The solution contains the computation of cost under activity based costing and traditional costing and to arrive at a decision which is preferable.