Fort Dearborn make 3 types of "peel and stick" labels for companies like Heinz, Kraft, and Ranch. Fort Dearborn applies overhead using a predetermined rate based on direct labor hours. While reviewing the financial information for Fort Dearborn you wonder if the company should switch to an activity based costing system. Before making a recommendation to management you decide to evaluate the impact activity based costing will have product costing.
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I have compared the cost for the Heinz, Kraft, and Ranch labels using traditional overhead allocation based on direct labor to an activity-based costing system where each job receives an overhead allocation based on their use of overhead resources (See Table 1 and 2 in Excel).
The amount of overhead, and the cost per unit, for each of these three products goes up using the six cost pools and six cost drivers under activity-based costing. This is not because overhead total costs have changed. Activity based costing does not cause overhead to grow. In fact, it can cause field workers to conserve their use of resources in order to reduce their ala-carte charges for overhead activities. Under the traditional labor hour ...
Your tutorial is a 443 word memo to the CFO recommending activity based costing and explaining why, even though it makes the cost of these three jobs higher, that it will benefit the firm and its pricing decisions. Two tables are created in Excel for you - job cost based on traditional (direct labor hours) and job cost based on activity based costing.