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Activity Based Costing versus Traditional Costing Problem. Currently Paradise Industries is considering changing to an Activity Based Costing System due to increased sales, increased number
Activity Based Costing versus Traditional Costing Problem. Currently Paradise Industries is considering changing to an Activity Based Costing System due to increased sales, increased number of products, and a more complex manufacturing process with many activities. Paradise Industries has the following overhead costs and cost drivers. \begin{tabular}{|c|c|c|c|} \hline Activity Cost Pools & Cost Driver & Estimated Overhead & Cost Driver Activity. \\ \hline Ordering and Receiving & Orders & $15,000 & 750 orders \\ \hline Machine Setup & Setups & $216,000 & 6000 setups \\ \hline Machining & Machine hours & $2,750,000 & 250,000MH \\ \hline Assembly & Parts & $1,125,000 & 1,500,000 parts \\ \hline Inspection & Inspections & $2,000,000 & 20,000 inspections \\ \hline Traditional Cost Pool & Direct Labor Hours & $6,106,000 & 122,120 DL Hours \\ \hline \multicolumn{4}{|c|}{ 1: Compute the total overhead costs assigned to Product B using activity based costing: } \\ \hline \multirow[t]{2}{*}{ Activity Cost Pool } & Product B Activity & SeeTip1below).ABCOverheadRate(Please & SeeTip2below).ProductBOverhead(Please \\ \hline & (a). & (b)_ & (ab) \\ \hline Ordering and Receiving & 250 Orders & & \\ \hline Machine Setup & 2,000 Setups & & \\ \hline Machining & 85,000 Machine hours & & \\ \hline Assembly & 400,000 Parts & & \\ \hline Inspection & 5,000 Inspections & & \\ \hline \end{tabular} Tip 1: ABC Overhead Rate = Estimated Overhead / Cost Driver Activity Tip 2: Product B Overhead = Product B activity x ABC Overhead Rate 2: Compute the total overhead costs assigned to Product B using traditional costing: \begin{tabular}{|c|c|c|c|} \hline Traditional Costing & Product B Activity & (PleaseSeeTip3below)TraditionalOverheadRate & Tip4below).OverheadCosts \\ \hline & (a). & (b) & (ab) \\ \hline Traditional Cost Pool & 16,620 DL Hours & & \\ \hline \multicolumn{4}{|c|}{ Tip 3: Traditional Overhead Rate = Estimated Overhead / Cost Driver Activity } \\ \hline \multicolumn{4}{|c|}{ Tip 4: Product B Overhead = Product B activity Traditional Overhead Rate } \\ \hline \multirow[t]{3}{*}{ 3: Compute and compare } & ABC Overhead Costs to Tr & Iditional Overhead Costs for & Product B: \\ \hline & Current Traditional OH & Proposed ABC OH & Increase/(Decrease) \\ \hline & (a). & (b)_ & (ba) \\ \hline Product B OH Costs & & & \\ \hline \end{tabular}
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