Individual assignment
Name: FANG, Yuening SID: 1155062139 Course Code: ACCT2121 E
Part I: Activity-Based Costing
1.
A. Calculate the unit manufacturing costs for simple desk and corner
workstation under ABC system.
Manufacturing overheads under ABC system
Activity Total
Activity
Costs
Practical
Capacity
Cost
Driver
rate
Simple Desk Corner
Workstation
Usage Costs Usage Costs
Design and plan
the production
process
$262,500 700 $375 40 $15,000 120 $45,000
Make layered
panels
$861,500 172,300 $5 8,520 $42,600 17,325 $86,625
Handle material $88,000 440 $200 60 $12,000 45 $9,000
Setup machine $40,000 1,600 $25 120 $3,000 180 $4,500
Run machine $601,250 23,125 $26 2,400 $62,400 3,150 $81,900
Inspect and
package the
product
$368,000 9,200 $40 1,200 $48,000 450 $18,000
Total Manufacturing overheads for:
Simple Desk: $183,000 Corner Workstation: $245,025
Unit manufacturing costs under ABC system
Simple Desk Corner Workstation
Direct material costs $115,200 $223,650
Direct manufacturing labor costs 10,800 8,100
Manufacturing overheads 183,000 245,025
Total manufacturing costs 309,000 476,775
Total units produced 1,200 450
Unit manufacturing costs under ABC system 257.5 1,059.5
B. Identify the problem with simple costing system and comment on how
ABC system might solve the problem.
Compare unit manufacturing costs under two systems
Simple desk Corner Workstation
Simple costing system $315 $935
ABC system 257.5 1,059.5
From the table above we can see, the unit manufacturing costs of simple desk
under ABC system is lower than that under simple costing system, while the unit
manufacturing costs of corner workstation under ABC system is higher than that
of simple costing system.
The problem of simple costing system is that it uses direct manufacturing labor
hours to allocate all manufacturing overheads to different products, which means
it uses broad averages to allocate costs uniformly regardless of how they are
actually incurred. However, the fact is that the direct manufacturing labor hours
are not the universal cost drivers for all departments. So under simple costing
system, it turns out that costs of simple desk is overcosted while costs of corner
workstation is undercosted.
ABC system might solve the problem because it chooses different cost drivers
accordingly to different operation activities, it ensures that each of them has a
cause-and-effect relationship. As a result, ABC system gives more accurate cost
information because it allocates indirect costs by using multiple drivers across
multiple levels.
2. Advices to improve the company’s profitability
EWF’s management can use cost figures under ABC system to make better
pricing decisions. According to the information given, it can make a new product
