Jones Inc. is a manufacturer that uses traditional costing system to allocate overhead cost where

they use direct labor cost as the allocation basis. Lately, the CFO of the company had become

increasingly aware because of the imbalance between product's budgeted and actual cost.

Horfield Inc. makes four products: Round, Rectangular, Square and Triangle

The costs for Direct Labor, Direct Material and Overhead are as of below:

Round

Rectangular Square Triangle

Units Produced 800 1500 800 1200

DM, $100,000 200,000 150,000 250,000

DL Hour 10,000 30,000 40,000 20,000

Avg Cost per DL hour $10/ per hour

Overhead Cost 200% of DL cost

Overhead Cost Driver

Allocation Base Total Cost Cost Driver Quantity

Depreciation 300,000 Machine Hour 3,000

Setup 700,000 Setup Hour 1,000

Rent 1,000,000 Square Feet 100,000

Resource used by Products

Cost Driver Round Rectangular Square Triangle

Machine Hour 500 900 400 1,200

Setup Hour 200 300 100 400

Square Feet 20,000 30,000 10,000 40,000

Requirement:

1. Compute the following:

i) overhead cost ii) unit product cost iii) total product cost

Using both traditional method and ABC method.

2. Which products were incorrectly priced using traditional method? What difficulties might

result from incorrectly priced product.

3. Define the following with examples:

a. Activity Rate

b. Cost Driver

4. Discuss the history of ABC method (Use references if you use any)