Using the traditional costing method, calculate the total costs per product?

Using the ABC method, calculate the total costs per product?

Assuming ABC allocated overhead costs more accurately, which products were incorrectly priced using the traditional costing method? What difficulties might result from incorrectly priced products?

Compare assigned costs per product under both methods. Why has activity-based costing changed the total costs assigned to each product?

What are the drawbacks of the ABC method?

CASE OVERVIEW The CFO at the Rubrics Corporation, a midsize hardware manufacturing firm, had become aware of the ongoing imbalance between the product's budgeted and actual costs. The Rubrics Corporation normally allocated overhead to products using a single direct cost driver, usually direct labor hours or direct labor dollars. This practice sometimes led to inaccuracies, since indirect costs were not incurred equally across products. For example, Rubrics' CFO had forecasted $10,000,000 in direct labor costs and $15,000,000 in overhead for a particular project last year, resulting in an overhead rate of 150 per cent. For each dollar of direct labor charged, $1.50 of overhead had been allocated. The shortcoming of this costing method was that overhead costs failed to reflect varying manufacturing intensity between products. RUBRICS' SITUATION Exhibit 1 The Rubrics Corporation made four products: widgets, gadgets, smidgets, and smadgets. summarizes the direct labor, overhead, and direct material costs associated with these products. Rubrics' CFO was considering implementing an activity-based costing system as a means of improving product pricing. Exh (depreciation, set-up, and rent). Exhibit 3 shows the product resource requirements by cost driver. Notice, for example, that the set-up requirement for widgets is 200 hours. ibit 2 presents the cost allocation bases for the three main overhead cost drivers Exhibit 1 DIRECT LABOR, OVERHEAD, AND DIRECT MATERIALS COSTS Total direct labor Total overhead Overhead rate Widgets direct labor Gadgets direct labor Smidgets direct labor Smadgets direct labor Widgets direct material Gadgets direct material Smidgets direct material $1,000,000 $2,000,000 200% of direct labor $100,000 $300,000 $400,000 $200,000 $100,000 $200,000 $150,000 $250,000 1.000 of each product Smadgets direct material Units built Exhibit 2 OVERHEAD COST DRIVERS Cost allocation basesTotal costs Depreciation Set-u Rent Quantity of CAB $700,000 $1,00 $300,000 3,000 machine hours 1,000 set-up hours 0,000 100,000 square feet Exhibit 3 PRODUCT RESOURCE REQUIREMENTS BY COST DRIVER Widgets Gadgets Smidgets Smadgets 500 machine hours 200 set-up hours 20,000 square feet 900 machine hours 300 set-up hours 30,000 square feet 400 machine hours 1,200 machine hours 400 set-up hours 40,000 square feet 100 set-up hours 10,000 square feet