Reference no: EM131796982

Activity-based costing

Here is the Ralston problem for example.  

Ralston's Machining produces specialized equipment. Currently, overhead costs are allocated at a rate of $5 per machine hour produced and the company used 20,000 machine hours last year.

Ralston's CEO has heard about ABC, and would like to see if it makes any difference in the costs allocated to jobs at the company.

The accounting staff has provided the following information about manufacturing overhead:

                                               Amount                             Cost Driver

Setups                                    $30,000                       Number of setups

Equipment                                20,000                        Number of machine hours

Inspection                                50,000                        Number of inspection

The company estimates that it will perform 150 setups and 1,000 inspections each year and will use 2,000 machine hours. Job CRT will require 18 setups, 85 machine hours, and 60 inspections.

A.  Using ABC, what amount of manufacturing overhead will be allocated to Job CRT?

B.  What amount would Ralston allocate to job CRT using their current, traditional system?

C.  Why do the two methods yield such different answers?