1. Activity Based Costing

Duncan Company recently introduced a markers to complement their other product, pencils. Accountants accumulate all overhead in a single cost pool and allocate it based on machine-hours. With the recent addition of an expanded computer system, Duncan decided to begin implementing ABC. A study reveals much overhead cost related to machine setups and batch changes. They select the number of setups and the number of batch changes as the activity driers for the two new cost pools. They will continue to use machine-hours as the base for allocating all remaining overhead. Accountants provide the following information about Duncan Companys most recent year of operations:

Pencils Markers Total

Units produced 5,000 1,000 6,000

Direct material cost per unit $ 5 $ 3

Direct labor cost 200,000 $300,000 $500,000

Machine hours 4,000 6,000 10,000

Machine setups 30 50 80

Batch changes 300 700 1,000

Overhead:

Machine setup-related $ 200,000

Batch-related 500,000

Other 1,500,000

$2,200,000

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Required:

Using the current costing system (Absorption costing), determine the total and unit cost for each product line.

Using the ABC costing system, determine the total and unit cost for each product line.

If you were the manager of the pencil department, which method would you prefer and why?

Product Costs using the Current Costing System

(Absorption Costing)

OHR =

Pencils Markers Total

Direct Material $ $ $

Direct Labor

Overhead

(OHR x AV)

Total Cost $ $ $

=======

Units produced

Cost per unit

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Product Costs using the ABC Costing System

OHR #1 = ____________ =

OHR #2 = ____________ =

OHR #3 = ____________ =

Pencils Markers Total

Direct Material $ $ $

Direct Labor

Overhead

(OHR x AV)

Total Cost $ $ $

Units produced =======

Cost per unit

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