Question
Pelles, Inc. produces two different products, Product A and Product B. Pelles uses a traditional volume-based costing system in which direct labor hours are the
Pelles, Inc. produces two different products, Product A and Product B. Pelles uses a traditional volume-based costing system in which direct labor hours are the allocation base. Pelles is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,000,000 across three activities: Design, Production, and Inpsection. Under the traditional volume-based costing system, the predetermined overhead rate is $2.50/direct labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows (5 points):
Activity Rate | usage by Product A | usage by Product B | |
Design (Engineering hours) | $600/hour | 200 | 300 |
Production (Direct Labor Hours) | $1.25 | 100,000 | 300,000 |
Inspection (Batches) | $500 | 300 | 100 |
Required: a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system. (Predetermined Overhead rate*Direct Labor Hour Per Unit) 2.50 X (100,000/
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system.
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
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