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Activity-Based Costing Approach of Current Period

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Please see attached questions.

The company is considering using an activity-based costing system to compute unit product costs for external financial reports
instead of its traditional system based on direct labor hours. The activity-based costing system would use three activity cost
pools.
Data relating to these activities for the current period are given below. Use the data for questions 1 to 4.
Estimated
Activity Overhead Expected Activity
Cost Pool Costs Product C Product D Total
Machine setups $ 13,630 130 160 290
Purchase orders 85,750 750 1,000 1,750
General factory 67,760 4,000 2,160 6,160
$167,140
1-Determine the unit product cost of each product for the current period using the activity-based costing
approach.
2 - Which cost method would you use to manage this business and why?
3- You are the product manager for product D and are evaluated based on product profitability. Which
method would you prefer?
4 - The government wants to buy product C and will pay the business for the cost of the product plus a
fixed fee. Should you adopt the ABC system or keep the old plant-wide overhead system and why?
5 - A customer has offered to buy a special order of 100 units of D for $60 each. This sale will not impact
any other part of your business and you have excess capacity to produce this special order and will
produce these extra units if you accept the order. How would this impact the business - would you be
better off and by how much? Would you need other information to answer this question and, if so, what
other information?

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Solution Summary

I put this in excel so you can see my computations. Click on cells to see formulas. I gave you some ideas to get you thinking about how to answers these questions.

Solution provided by:
Carol Sargent, PhD
Education
  • BSc, University of Virginia
  • MSc, University of Virginia
  • PhD, Georgia State University
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