Reference no: EM13748887

A company is considering the adoption of an activity based costing system because the managers suspect that their traditional costing system distorts the product costs. The company produces and sells two products, Standard and Deluxe. Their traditional costing system uses machine hours as the allocation base for manufacturing overhead cost. The production managers decided that major activities are Assembly, Machine Setups, and Parts Administration and determined the costs for each activity. They also identified how many machine hours, setups, and parts each product requires:

Standard: Price: $120 per unit Deluxe : $150 per unit

Cost: Direct Materials: Standard : $32 per unit Deluxe : $36 per unit

Direct Labor: Standard: $15 per unit Deluxe: $25 per unit

Units Produced: 200,000 units: Standard Deluxe: 100,000 units

Activity:

Assembly (machine hours): Standard: 100,000 Deluxe : 200,000

Machine setups (setups): Standard: 100 Deluxe: 400

Parts administration (part types): Standard: 200 Deluxe: 200

Overhead (Cost) :

Assembly: $1,200,000

Machine Setups: $900,000

Parts Administration: $300,000

Question 1) Compared with the unit product cost calculated by the ABC system, what is the distortion (difference) created by the traditional costing system for Deluxe Product ?

A) Under the traditional costing system the product is undercosted by $0.35 per unit

B) Under the traditional costing system the product is overcosted by $0.35 per unit

C) Under the traditional costing system, the product is undercosted by $0.70 per unit

D) Under the traditional costing system, the product is overcosted by $0.70 per unit

E) None of above

PLEASE SHOW HELP WITH STEPS AND SOLUTION

Question 2) The company is assumed to spend equal money on customer relations among its two customers A and B. Total costs of customer relation for these two customers are $10,000. Customer A placed an order as below. Using the ABC system, the customer margin of product A is (choose closest answer)?

Standard: 100 units Deluxe: 250 units

A) $44,960

B) $45,100

C) $20,010

D) $20,150

E) $25,010

AGAIN, PLEASE SHOW HELP WITH DETAILED STEPS AND SOLUTION

Question 3) Which of the following statements is correct ?

A) Compared with the ABC Method, the traditional method overcosts both Standard and Deluxe

B) Compared with ABC Method, the traditional method undercosts both Standard and Deluxe

C) Compared with the ABC Method, the traditional method undercosts Standard and overcosts Deluxe

D) Compared with the ABC Method, the traditional method overcosts Standard and undercosts Deluxe

E) None