Activity Based Costing vs. Traditonal Costing
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B Town Motors produces boat motors and is considering a shift to activity-based costing. Its controller is interested in using a recent order for 200 motors sold to Martin Sports to compare traditional costing wtih activity-based costing. The costs for this order consist of direct materials fo $60,000, purchased parts for $80,000, 1,000 direct labor hours at an average direct labor rate of $14 per hour, and a manufacturing overhead rate of 200% of direct labor costs.
In addition the controller has collected the following information:
Activity Activity Cost Rate Cost Driver Level
Parts production $40 per machine hour 400 machine hours
Assembly $30 per direct labor hour 60 direct labor hours
Packing/shipping $20 per unit 200 units
Work Cell Setup $200 per set up 20 setups
1) Using the traditional costing approach, a) compute the total production costs and b) product unit cost for the order
2) Using activity based costing a) compute the total production costs and b) product unit cost for the order
3) what is the difference between the product unit cost using the traditional method versus the activity based costing method? Which method do you think is better representation of "true costs"? Why?
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The solution discusses activity based costing vs. traditional costing.
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