Question
Carter, Inc. produces two different products, Product A and Product B. Carter uses a traditional volume-based costing system in which direct labor hours are the
Carter, Inc. produces two different products, Product A and Product B. Carter uses a traditional volume-based costing system in which direct labor hours are the allocation base. Carter is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,020,000 across three activities: Design, Production, and Inspection. Under the traditional volume-based costing system, the predetermined overhead rate is $2.55/direct labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows:
Activity Rate | Usage by Product A | Usage by Product B | |||||||
Design (Engineering Hours) | $ | 500 | /hour | 100 | 300 | ||||
Production (Direct Labor Hours) | $ | 1.50 | 100,000 | 300,000 | |||||
Inspection (Batches) | $ | 550 | 300 | 100 | |||||
Required:
a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system.
Indirect manufacturing costs:
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system.
Indirect manufacturing costs:
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
Indirect manufacturing costs: d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
Indirect manufacturing costs: e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC? Product A:
Product B:
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