Herron Electronics produces video games in three market categories, commercial, home, and miniture. Herron has traditionally allocated overhead costs to the three products using the companywide allocation base direct labor hours. The company recently implemented an ABC system when it installed computer-controlled assembly stations that rendered the traditional costing system ineffective. In implementing the ABC system, the company identified the following activity cost pools and cost drivers.
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A. Determine the total cost and cost per unit for each product line, assuming that overhead costs are allocated to each product line using direct labor hours as a companywide allocation base. Also determine the combined cost of all three product lines.
B. Determine the total cost and cost per unit for each product line, assuming that an ABC system is used to allocate overhead costs. Determine the combined cost of all three product lines.
C. Explain why the combined total cost computed in Requirements A and B is the same amount. Given that the combined cost is the same using either allocation method, why is an ABC system with many different allocation rates more accurate than a traditional system with a single company-wide overhead rate?
C - The cost is same because we tend to calculate the total cost of products for Herron Electronics. This total ...
The solution determines Herron Electronics cost of products line based on activity based costing (abc) system and explains importance of ABC sytem against traditionall costing system.