Question
DJ Sports Products manufactures and distributes three types of golf clubs: beginners, intermediate, and advanced. The materials used in these clubs increases in each level
DJ Sports Products manufactures and distributes three types of golf clubs: beginners, intermediate, and advanced. The materials used in these clubs increases in each level and allows for more precise balancing and longer wear. Production is highly automated for the beginners clubs, whereas the intermediate and advanced clubs require a varying degree of labor, depending on the intricacy of the balancing process. DJ applies all indirect costs according to a predetermined rate based on direct labor hours. A consultant recently suggested that DJ switch to an activity-based costing (ABC) system, and identified the following cost breakdown for the upcoming year: Estimated Activity Recommended Cost Drivers Costs Cost Driver Order processing Number of orders $80,000 200 orders Production setup Number of production runs 300,000 100 runs Materials handling Pounds of materials used 450,000 150,000 lbs. Machine depr. and Maintenance Machine hours 400,000 25,000 hours Quality control Number of inspections 100,000 50 inspections Packing Number of units 30,000 300,000 units In addition, management estimates 40,000 direct labor hours will be used in the upcoming year at a rate of $16 per hour. Assume that the following activity took place in the first month of the upcoming year: Beginners Intermediate Advanced Number of units produced 30,000 10,000 5,000 Direct material costs $28,000 $15,000 $10,000 Direct labor hours 750 1,200 2,000 Number of orders 9 6 5 Number of production runs 2 2 3 Pounds of material 1,200 5,000 2,500 Machine hours 1,500 500 400 Number of inspections 4 4 3 Number of units shipped 25,000 9,000 4,000 Required: a) Compute the production costs for one unit of each product under a traditional cost system in the first month of the upcoming year using direct labor hours as the allocation base. b) Compute the production costs for one unit of each product in the first month of the upcoming year using activity based costing. c) Explain the difference between the costs of the two products under the traditional costing system and activity based costing.
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