Reference no: EM132078338

Question - Activity Based Costing

The Try Corporation has a machining facility specializing in jobs for the aircraft-components market. Try's previous simple job-costing system had two direct-cost categories (direct materials and direct manufacturing labor) and a single indirect-cost pool (manufacturing overhead, allocated using direct manufacturing labor-hours). The indirect cost-allocation rate of the simple system for 2016 would have been $115 per direct manufacturing labor-hour.

Recently a team with members from product design, manufacturing, and accounting used an ABC approach to refine its job-costing system. The two direct-cost categories were retained. The team decided to replace the single indirect-cost pool with five indirect-cost pools. The cost pools represent five activity areas at the plant, each with its own supervisor and budget responsibility. Pertinent data are as follows:

Activity Area	Cost-Allocation Base	Cost-Allocation Rate
Materials handling	Parts	$ 0.40
Lathe work	Lathe turns	0.20
Milling	Machine-hours	20.00
Grinding	Parts	0.80
Testing	Units tested	15.00

 

	Job 410	Job 411
Direct material cost per job	$ 9,700	$59,900
Direct manufacturing labor cost per job	$750	$11,250
Number of direct manufacturing labor-hours per job	25	375
Parts per job	500	2,000
Lathe turns per job	20,000	59,250
Machine-hours per job	150	1,050
Units per job (all units are tested)	10	200

Required:

1. Compute the manufacturing cost per unit for each job under the previous simple job-costing system.

2. Compute the manufacturing cost per unit for each job under the activity-based costing system.

3. Compare the per-unit cost figures for Jobs 410 and 411 computed in requirements 1 and 2. Why do the simple and the activity-based costing systems differ in the manufacturing cost per unit for each job? Why might these differences be important to Try Corporation?