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 A		Product B
Requires 3,680 hours of testing		Requires 920 hours of testing
Requires 5,390 units of computing power		Requires 2,310 units of computing power
Requires 20 developer hours to implement		Requires 80 developer hours to implement

Cost Items	Cost of Each Activity
Testing:	$30,800
Computing power:	$46,200
Developer hourly cost:	$12 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 A			Product B
Percentage of developer hours	20%		Percentage of developer hours	80%
Testing cost	$		Testing cost	$
Computing cost	$		Computing cost	$
Developer cost	$		Developer cost	$
Total cost	$		Total cost	$

Seeing how many resources each product (A and B) requires for production compared to the costs calculated under traditional costing, does traditional costing serve as an accurate gauge of costs?

Activity-Based Costing

Using the data above for products A and B, 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.

Cost	Activity Base
Testing	Hours of testing
Computing cost	Units of computing power
Developer cost	Development hours

Product A			Product B
Testing cost	$		Testing cost	$
Computing cost	$		Computing cost	$
Developer cost	$		Developer cost	$
Total cost	$		Total cost	$

Activity-based costing for varying batch production

A manufacturing company has the following two activities associated with completion of products:

The setting up of machines for running batches of products

The actual production of units produced

The company has annual manufacturing overhead costs of $2,000,000, of which $200,000 is directly involved in setting up machines for batch runs. During the year, the company expects to perform 400 machine setups, one setup per batch for a total of 400 batches of production. Assume that the batch sizes vary considerably, but the work involved in setting up the machines is not appreciably different from one job to the next.

If the company estimates that the $200,000 costs associated with setups will yield 400 setups this year, the cost associated directly with each setup will be $ per setup. Because each job will require its own setup, setup costs are viewed as batch costs. Because $200,000 of the $2,000,000 are costs associated with setups, this means that costs associated directly with the production of units equal $.