Required:

1. Calculate the cost of each product using a plant-wide rate based on direct labor hours.

2. Cost out the two products using an activity-based costing system.

3. Differentiate between simple costing and ABC costing in this example.

4. In what all circumstance ABC method is recommended?

QUESTION 1 (25 Marks) The ABC Company produces only two products: a major computer part and cell phones. The company uses a normal cost system and overhead costs are currently allocated using a plant- wide overhead rate based on direct labor hours. Outside cost consultants have recommended, however, that the company use activity-based costing to charge overhead to products. The company expects to produce 4,000 computer parts and 2,000 cell phones in 2019. Each computer part requires two direct labor hours to produce and each cell phone requires one-half hour to produce. The direct material and direct labor costs included in the two products are as follows Item Computer Part Cell-Phone Direct Material (per unit) $60 $34 Direct Labor (per unit) $32 $ 8 Budgeted (Estimated) Total Factory Overhead Data For 2019: Activity Budgeted Overhead ($) Production Setups $160,000 Material Handling $140,000 Packaging and Shipping $240,000 Total Factory Overhead $540,000 Estimated Volume Level 40 setups 10,000 lbs. 12,000 boxes Based on an analysis of the three overhead activities, it was estimated that the two products would require these activities as follows in 2019: Activity Computer Parts Cell Phones Totals Production Setups 10 setups 15 setups Material Handling 2,000 lbs. 4,000 lbs. 6,000 lbs. Packaging and Shipping 5,000 boxes 2,000 boxes 7,000 boxes 25 setups