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overcosting and undercosting: traditional vs ABC costing

Mott Manufacturing allocates factory overhead using one cost pool with direct labor hours as the allocation base.Mott has two production departments, P1 and P2.The new accountant at Mott estimates that next year, the total factory overhead costs will be $5,000,000, and approximately 500,000 direct labor hours will be worked.The accountant also estimates that P1 will use 150,000 direct labor hours,and there will be about $3,000,000 in overhead costs in P1. P2 will use 350,000 direct labor hours, and there will be $2,000,000 in overhead costs in P2. Mott has two products, A1 and B1. It takes two direct labor hours in P1 and three direct labor hours in P2 to complete one unit of A1. It takes one direct labor hour in P1 and four direct labor hours in P2 to complete one unit of B1.


Which product will be undercosted and which will be overcosted with the one-cost-pool system?

Support your answer with appropriate calculations.

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Solution Summary

This is a classic issue! Allocating under different methods leads to different absorption of total overhead...with winners and losers. First, overcosting and undercosting is defined and then computations and discussion show how it applies in this circumstance. Once you get this, you are ready for most any "traditional vs abc" costing problem!