(A) Discuss the circumstances that would require a business to change from traditional costing to ABC costing? (B) Takulah Co. Ltd has traditionally allocated its overhead based on machine hours but had collected this information to change to activity-based costing: Estimated Activity Activity Center Product 1 Product 2 Estimated Cost Machine Setups 15 45 $10,800 Assembly Parts 3000 3000 $144,600 Packaging Pieces 500 400 $55,350 Machine Hour per Unit 4 3 Production Volume 750 1500 Required: i) How much overhead would be allocated to each unit under the traditional allocation method? ii) How much overhead would be allocated to each unit under activity-based costing? iii) Would you recommend a change to ABC costing for this company? Justify your answer.
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
(A) Discuss the circumstances that would require a business to change from traditional costing to ABC costing?
(B) Takulah Co. Ltd has traditionally allocated its
Estimated Activity
Activity Center Product 1 Product 2 Estimated Cost
Machine Setups 15 45 $10,800
Assembly Parts 3000 3000 $144,600
Packaging Pieces 500 400 $55,350
Machine Hour per Unit 4 3
Production Volume 750 1500
Required:
i) How much overhead would be allocated to each unit under the traditional allocation method?
ii) How much overhead would be allocated to each unit under activity-based costing?
iii) Would you recommend a change to ABC costing for this company? Justify your answer.
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