Problem: ABC vs Traditional Chap 5 Domino Labs is a freestanding facility that conducts two kinds of tests for nearby physician practices. Test 1 is ordered in large volumes and can be processed in large batches. Test 2 is ordered in much smaller quantities and is processed in smaller batches. In addition, to ensure quality for test 2, Domino must purchase the necessary reagents in small quantities. Domino has a single facility where it conducts all its tests. Its major direct cost is labor, although each test also requires small amounts of reagents. However, there is a substantial amount of overhead in the labs purchasing and material-handling activities. Many of these activities are highly automated, especially material handling. The expected direct costs for a single test of each type are as follows:

Test 1 Test 2 Direct material $0.50 $1.00 Direct labor $3.00 $3.00 Other direct costs $1.00 $1.00

Dominos budget for the upcoming year includes overhead of $1.32 million, which currently is attached to each test on the basis of machine hours. However, Dominos controller believes that this approach may be providing misleading information. She has developed the following analysis of the budgeted overhead costs:

Activity Cost Driver Number Cost Purchasing Purchase order (POs) 1,200 POs $600,000 Material handling Batches 1,800 batches $720,000 TOTAL OVERHEAD COSTS $1,320,000

Budget data for producing the two tests throughout the upcoming year are as follows: Test 1 Test 2 Total Tests conducted 800,000 200,000 1,000,000 Machine hours 400,000 100,000 500,000 Purchase orders 400 800 1,200 Batches 500 1,300 1,800

Using these data and the table that follows, determine the cost of one test each type, first using the traditional approach of absorbing overhead based on machine hours, and then using an ABC approach.

Traditional Approach ABC Approach Test 1 Test 2 Test 1 Test 2 Direct Material $0.50 $1.00 $0.50 $1.00 Direct labor 3.00 3.00 3.00 3.00 Other direct 1.00 1.00 1.00 1.00 Overhead ?_______ ?_______ ?_______ ?______ TOTAL

What accounts for the difference?