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.
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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.
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 ...
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