Implementing an abc system compared to traditional costing

Reference no: EM13875843

Q1 List two advantages and two disadvantages of implementing an ABC system compared to traditional costing.

Q2 BCH Corporation produces and sells two types of sofa pillows: plain and fancy. Currently, BCH uses a traditional costing system with direct labor hours as the allocation base. Actual hours for 20x3 were 20,000. In anticipation of developing an activity-based costing system, BCH has identified the following cost pools and activities associated with pillow production:

Estimated Costs Actual Costs

Activity Driver for 20x4 for 20x3

Material cutting Number of cuts $16,000 $13,665

Sewing machine setups Number of setups 27,000 24,800

Factory maintenance Number of direct labor hours 15,000 17,000

$58,000 $55,465

Total estimated overhead cost = $58,000

Direct costs for a plain sofa pillow are $1.25 for material and $2.00 for direct labor (0.25 h @ $8.00 per hour). Direct costs for a fancy sofa pillow are $1.50 for material and $4.00 (0.5 h @ $8.00 per hour). In 20x4, BCH expects to make 8,000 fancy pillows and 10,000 plain pillows. Those output levels will require 5 setups for fancy pillows and 10 setups for plain pillows. For the material cutting activity, the number of cuts is estimated at 10,000 for each type of pillow.

a. Calculate the cost per unit for each type of pillow under traditional costing

b. Calculate the cost per unit for each type of pillow under ABC

Q3 Abdullah Motors manufactures cars and currently uses only 50% of its manufacturing facility (20,000 cars). The company could utilize more of its facility by producing its own tires and using the total capacity. It currently purchases tires at $30 per unit. Abdullah would incur $12 per unit for direct materials, $10 for direct labor, and $24 for overhead (which is 30% variable) if it produces the tires.

a. Should Abdullah Motors make or buy the tires? Provide calculations that support your answer.

b. Suppose Abdullah Motors could rent the unused portion of its plant and receive $1,500 a month. Should the company make or buy the tires? Provide calculations that support your answer

c. List two qualitative factors that could affect this decision.

Reference no: EM13875843

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