Case Study:

The job costing system at Sheri's Custom Framing has five indirect-cost pools (purchasing, material handling, machine maintenance, product inspection, and packaging). The company is in the process of bidding on two jobs: Job 215, an order of 15 intricate personalized frames, and Job 325, an order of 6 standard personalized frames. The controller wants you to compare overhead allocated under the current simple job-costing system and a newly designed activity-based job-costing system. Total budgeted costs in each indirect-cost pool and the budgeted quantity of activity driver are as follows:

Budgeted Overhead

Activity Driver

Budgeted Quantity of Activity Driver

Purchasing

$45,000

Purchase orders processed

2,500

Material handling

58,750

Material moves

4,500

Machine maintenance

125,650

Machine-hours

11,000

Product inspection

10,000

Inspections

1,500

Packaging

22,350

Units produced

3,900

$261,750

Information related to Job 215 and Job 325 follows. Job 215 incurs more batch-level costs because it uses more types of materials that need to be purchased, moved, and inspected relative to Job 325.

Job 215

Job 325

Number of purchase orders

28

9

Number of material moves

12

5

Machine-hours

45

70

Number of inspections

10

5

Units produced

16

8

Direct material and direct Labors of the two Jobs are similar at $ 10,000 & 8,000 respectively.

Required:

Compute the total overhead allocated to each job under a simple costing system, where overhead is allocated based on machine-hours. Compute the total overhead allocated to each job under an activity-based costing system using the appropriate activity drivers. Compute the total cost of each job using the ABC system. Do activity-based costing systems always provide more accurate product costs than conventional cost systems? Why or why not?