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    Comparison Between ABC and Traditional Costing

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    Applewood Electronics manufactures two large-screen television models, the Monarch, which has been produced for five years and sells for $900, and the Regal, a new model that sells for $1,140. Applewood's CEO, Harry Hazelwood, suggested that the company should concentrate its marketing resources on the Regal model and begin to phase out the Monarch model.

    Applewood currently uses a traditional costing system. The following cost information has been used as a basis for pricing decisions over the past year.

    Per-Unit Data Monarch Regal
    Direct materials
    $208
    $584
    Direct labor hours
    1.5
    3.5
    Machine hours
    8.0
    4.0
    Units produced
    22,000
    4,000
    Direct labor cost is $12 per hour, and the machine usage cost is $18 per hour. Manufacturing overhead costs were estimated at $4,800,000 and were allocated on the basis of machine hours.

    Martin Alecks, the new company controller, suggested that an activity-based costing analysis first be run to get a better picture of the true manufacturing cost. The following data were collected:

    Activity Center Cost Driver Traceable Costs
    Soldering
    Number of solder joints
    $ 942,000
    Shipments
    Number of shipments
    860,000
    Quality control
    Number of inspections
    1,240,000
    Purchase orders
    Number of orders
    950,400
    Machining
    Machine hours
    57,600
    Machine setups
    Number of setups
    750,000
    Total traceable costs
    $4,800,000
    Number of Events
    Activity Monarch Regal Total
    Soldering
    1,185,000
    385,000
    1,570,000
    Shipments
    16,200
    3,800
    20,000
    Quality control
    56,200
    21,300
    77,500
    Purchase orders
    80,100
    109,980
    190,080
    Machining
    176,000
    16,000
    192,000
    Machine setups
    16,000
    14,000
    30,000
    Selling, general, and administrative expenses per unit sold are $265.00 for Monarch and $244.50 for Regal.

    REQUIRED:

    A.
    Calculate the manufacturing cost per unit for Monarch and Regal under:
    1. A traditional costing system
    2. The ABC system
    B.
    Explain the differences in manufacturing cost per unit calculated in part (A).

    C.
    Calculate the operating profit per unit for Monarch and Regal under:
    1. A traditional costing system
    2. The ABC system

    D.
    Should Applewood concentrate its marketing efforts on Monarch or on Regal? Explain how the use of ABC affects your recommendation.

    © BrainMass Inc. brainmass.com October 10, 2019, 8:02 am ad1c9bdddf
    https://brainmass.com/business/finance/comparison-between-abc-traditional-costing-605627

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    Solution Preview

    Hi there! Below and attached are the solutions to your cost accounting questions. Please let me know if you need further clarification and we will work through it.

    See the tab named "Compare" on the spreadsheet "Posting ID 605627 Cost Acctg" spreadsheet for manufacturing cost per unit for Monarch and Regal under both traditional and ABC systems.

    Notice direct costs are calculated the same way in both cases; it is the allocation of manufacturing overhead that differs. An ABC system would result in more accurate cost estimates than a traditional costing system because resource consumption estimates are generated based on various types of activities that occur in the manufacturing process and ...

    Solution Summary

    This in-depth solution provides a comparison between ABC and Traditional Costing by showing detailed steps to calculate the manufacturing cost per unit and operating profit per unit. It also provides an analysis on marketing efforts and the differences in manufacturing cost per unit.

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