M3 Discussion question:

Harris systems specializes in services for workgroup, e-commerce and ERP applications. The companys original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of $22.00 per direct labor hour.

A task force headed by Harriss CFO recently designed an ABC system with four activities. The ABC system retains the current systems two direct cost categories thus, it budgets only overhead costs for each activity.

Activity Allocation base cost

Materials handling number of parts $0.85

Machine set-up number of set-ups $500.00

Assembling assembling hours $80.00

Shipping number of shipments $1,500.00

Harris systems has been awarded two new contracts, which will be produced as job A and job B. Budget data relating to the following contracts.

Job A Job B

Number of parts 15,000 2,000

Number of set-ups 6 4

Number of assembling hours 1,500 200

Number of shipments 1 1

Total direct labor hours 8,000 600

Number of output units $220,000 $30,000

Direct materials cost $220,000 $30,000

Direct labor cost $160,000 $12,000

Requirements:

1. Compute the product cost per unit for each job, using the original costing system (with two direct cost categories and a single overhead allocation rate).

2. Suppose Harris system adopts the ABC system. Compute the product cost per unit for each job using ABC.

3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them, Explain?