ABC vs. Traditional Costing

ABC vs. Traditional Costing 3M Corporation is applying manufacturing overhead to its product on the basis of direct labor costs. The company has two products, Standard and Deluxe. The company recently start producing the Deluxe product and was expecting a higher increase. Last year's manufacturing overhead was $880,000, based on production of 320,000 units of Standard and 120,000 units of Deluxe. Selling prices were $3.60 per Standard and $5.80 per Deluxe. Direct materials and direct labor costs were as follows: Standard Deluxe Direct Materials $125,000 114,000 Direct Labor 160,000 80,000 Mark Jarrod, the new company's controller, is considering the use of Activity-Based Costing (ABC) for the company. He identified three major activities related to overhead as follows: Activity Cost Assigned Standard Deluxe Number of Production Runs $300,000 Quality Tests Performed 360,000 50 Shipping Orders Processed 220,000 100 $880,000 20 12 10 18 REQUIRED: (a) Compute the cost per unit for Standard and Deluxe, assuming the use of direct labor costs as an application rate. Delux: (194,000) / 120,000 = 1.61 standard Delua (c)(650,000 ) $2937333,333 standard ( 20 ) 1850,600) 13 586,666.667 sa ma sulu.com Standard: (285,000) / 320,000=0.89 (b) Compute the cost per unit for Standard and Deluxe, assuming the use of ABC. (c) Compute the profit margin per unit for each product. increase as management expected? (d) How might the results explain why the profits did