Activity-Based Costing

Best Bet Automotive, Inc. has been manufacturing automobiles for the past fifteen years. The company has been using the same job-order costing system for the entire time they have been in business. The system applies indirect manufacturing costs based on the number of machine-hours.

The income statement reflecting last years information (before variable overhead cost allocation) is reflected below.

You have been hired as an outside consultant to compare the traditional costing system to an activity- based costing system. Based on interviews with company staff, you have come up with the following cost allocation information:

Based on the information provided:

(1) Prepare an income statement using the traditional job-order costing system to allocate variable overhead costs. Round all amounts to the nearest dollar.

(2) Prepare an income statement using the activity-based costing system you formulated based on staff interviews. You must list the variable overhead costs separately on your income statement. Round all amounts to the nearest dollar.

(3) Based on the statements you prepare, would you recommend that Best Bet Automotive,Inc. adopt the activity based costing system? Include the reasoning for your answer.