Reference no: EM132836131

Problem - Yarn Company produces two different Yarn products, Cotton Yarn (Product A) and Wool Yarn (Product B). Yarn Company uses a traditional volume-based costing system in which direct labor hours are the allocation base. Yarn Company is considering switching to an ABC system by splitting its manufacturing overhead cost of $3,600,000 across three activities: Engineering, Manufacturing, and Inspection. Under the traditional volume-based costing system, the predetermined overhead rate is $7.00/direct labor hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows:

	Activity Rate	Usage by Cotton Yarn (Product A)	Usage by Wool Yarn (Product B)
Engineering (Engineering Hours)	$460/hour	4,000	18,000
Manufacturing (Direct Labor Hours)	$1.00	1,400,000	1,400,000
Inspection (Batches)	$840	3,000	9,000

Required -

a. Calculate the indirect manufacturing costs assigned to Cotton Yarn under the traditional costing system.

b. Calculate the indirect manufacturing costs assigned to Wool Yarn under the traditional costing system.

c. Calculate the indirect manufacturing costs assigned to Cotton Yarn under the ABC system.

d. Calculate the indirect manufacturing costs assigned to Wool Yarn under the ABC system

e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?