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Kalder Products manufactures two component parts, AJ40 and AJ60. AJ40 components are being introduced currently, and AJ60 parts have been in production for several years. For the upcoming period, 1,000 units of each product are planned for manufacturing. Assume that the only relevant overhead cost is for engineering change orders (any requested changes in product design or the manufacturing process). AJ40 components are expected to require four change orders, and AJ60 only two. Each AJ40 requires 1 machine hour, and each AJ60 requires 1.5 machine hours. The cost of a change order is $300.
A. Estimate the cost of engineering change orders for AJ40 and AJ60 components if Kalder uses a traditional costing method and machine hours as the allocation base.
B. Now suppose that Kalder uses an ABC system and allocates the cost of change orders using as cost driver the number of change orders. Estimate the cost for change orders for each unit of AJ40 and AJ60.
C. Calculate the difference in overhead allocated to each product. This figure represents and amount that one product cross-subsidizes the other product. Explain what that means.
This solution discusses traditional vs. ABC costing for Kalder Products.