ABC versus traditional costing. Euro Tech Corporation produces two types of audiocassettes:

standard and high-grade. The standard cassettes are used primarily in answering machines and are designed for durability rather than accurate sound reproduction.

The company only recently began producing the higher-quality, high-grade model to enter the lucrative music-recording market. Since the new product was introduced, profits have been steadily declining, although sales of the high-grade tape have been growing rapidly. Management believes the accounting system may not be accurately allocating costs to products.

Management has asked you to investigate the cost allocation problem. You find that manufacturing overhead is currently assigned to products based on the direct labor costs in the products. Last year's manufacturing overhead was $880,000. based on production of 320,000 standard cassettes and 100.000 high-grade cassettes. Selling prices last year averaged $3.60 per standard tape and $5.80 per high-grade tape.

Direct labor and direct materials costs for last year were as follows:

Management believes the following three activities cause overhead costs. The cost drivers and related costs are as follows: 

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 Euro Tech's declining profits?

Transcribed Image Text:

Standard Direct Labor Materials $174.000 125.000 High-Grade Total $ 66,000 114,000 $240.000 239.000