Contrasting Activity-Based Costing and Traditional Product Costs [LO1 CC1; LO2 CC3, 6, 7]

CHECK FIGURE

1. (2b)Total cost of the cinema job: $2,526,505

Case Construction Company, a three-year-old business, provides contracting and construction services to a variety of clients. Given that each construction job is different from any other, company accountant Susan Kalagnanam decided that it was best to use a job-order costing system to allocate costs to the different jobs. She decided to use construction labour-hours as the basis for overhead allocation. In December 2020, she estimated the following amounts for the year 2021:

Direct materials	$14,560,000
Construction labour	10,200,000
Overhead	7,900,000
Construction labour-hours	500,000

Kalagnanam recorded the following for the first quarter of 2021 for the three jobs that the company started and completed during the quarter:

	School	Residential	Cinema
Direct materials	$824,000	$1,034,600	$1,425,000
Construction labour-hours	66,400	37,200	18,500

Required:

1. Compute the cost of each job using the current system of cost allocation.

2. Tyler Case, the companys CEO, recently returned from a seminar on activity-based costing and instructed Kalagnanam to consider implementing the new system. As a first step, he instructed her to analyze the overhead costs for 2021. Through her research she was able to derive the following breakdown of the estimated overhead costs for 2021:

   Activity	Amount	Activity Measure	Activity Volume
   Foundation laying	$1,830,500	Foundation-laying hours	425,700
   Building construction	1,740,000	Construction labour-hours	500,000
   Painting	1,892,000	Painting-hours	550,000
   Finishing	2,437,500	Finishing-hours	750,000

   She also documented the following activity on the three jobs during the first quarter of 2021 (in addition to the construction labour-hours consumed by the three jobs):

   	School	Residential	Cinema
   Foundation-laying hours	39,550	38,500	44,250
   Painting-hours	49,380	36,120	47,660
   Finishing-hours	41,460	60,600	94,000

   Calculate the following:

   1. The activity rates for each of the four activities.

   2. The total cost of each job using activity-based costing.

3. Both Kalagnanam and Case are wondering if using activity-based costing will eliminate the existence of under- or overapplied overhead. As a managerial accountant, explain to them whether the use of activity-based costing will always result in zero under- or overapplied overhead.