Comparing Two Products under Traditional and Activity-Based Costing

Compare two projects under development by the same company. The following are a few aspects of each product's development process relevant to costs.

Product SProduct TRequires 3,840 hours of testingRequires 960 hours of testingRequires 5,040 units of computing powerRequires 2,160 units of computing powerRequires 25 developer hours to implementRequires 75 developer hours to implementCost ItemsCost of Each ActivityTesting:$28,800Computing power:$43,200Developer hourly cost:$15 per hour

Traditional Costing

Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing. In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project. If required, round your answers to the nearest dollar.

Product SProduct TPercentage of developer hours25%Percentage of developer hours75%Testing cost$Testing cost$Computing cost$Computing cost$Developer cost$Developer cost$Total cost$Total cost$

Percentage of developer hours+Percentage of developer hours for Product S (25%)

Allocation basis for Product S:The amount of labor hours associated directly with Product S, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product S under the traditional costing method.25(25+75)

+Percentage of developer hours for Product T (75%)

Allocation basis for Product T:The amount of labor hours associated directly with Product T, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product T under the traditional costing method.75(25+75)

Review the resources each product (S and T) requires for production and compare that to the costs calculated above under traditional costing. Does traditional costing serve as an accurate gauge of costs?

No

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Using traditional cost assignment means pegging overhead costs based on a direct cost, such as direct labor or direct materials. In this case, you use direct labor (developer hours) as the basis for overhead allocation.

For product S, the percentage of developer labor costs as a proportion of the whole is already calculated. This is the figure that, when multiplied by the overhead values, will yield the overhead assigned to each project under traditional costing.

Activity-Based Costing

Using the data above for products S and T, calculate the costs using activity-based costing. Allocate the costs of testing, computing, and development based on the rates of activity consumed by each product's development process. If required in your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar.

CostActivity BaseTestingHours of testingComputing costUnits of computing powerDeveloper costDevelopment hours

Product SProduct TTesting cost$Testing cost$Computing cost$Computing cost$Developer cost$Developer cost$Total cost$Total cost$

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