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Activity Based Costing

Please see attached.

ABC vs. Traditional Cost Analysis

Standard High-grade Total
Direct Labor $160,000 $80,000 $240,000
Direct Materials $125,000 $114,000 $239,000
CDs Produced 320,000 120,000 440,000
CD Selling Price $3.60 $5.80

Activity Level
Costs Assigned Standard High-grade Total
Number of Production Runs $300,000 20 10 30
Quality Tests Performed $360,000 12 18 30
Shipping Orders Processed $220,000 100 50 150
Total Overhead $880,000

a. How much of the overhead will be assigned to each product if the three cost drivers are used
to allocate overhead? What would be the cost per unit produced for each product?

b. How much of the overhead would have been assigned to each product if direct labor cost had
been used to allocate overhead? What would have been the total cost per unit produced for each
product?

c. How might the results explain why profits did not increase as much as management expected?

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Solution Summary

The solution explains overhead allocation using traditional costing and activity based costing

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