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Contrasting Traditional and ABC Costing Zammit Engineering manufactures a number of components that are sold to the electronics industry Most of the manufacturing processes

Contrasting Traditional and ABC Costing) Zammit Engineering manufactures a number of components that are sold to the electronics industry. Most of the manufacturing processes are common to the products, and the direct costs (raw materials and labour) are relatively small in relation to the overhead costs, a consequence of the investment in sophisticated technology to mass-produce large numbers of items.

Zammit Engineering has divided its product range into four product groups: liggles, kicklets, zonnets, and carusos. Each product group is manufactured across three departments: Design, Machining, and Assembly. While design and assembly are labour-intensive, machining is capital-intensive.

Overhead costs have been estimated for each of the cost centres as follows:

 

Design

Machining

Assembly & Distribution

Overhead costs

$150,000

$250,000

$200,000

The number of direct labour hours (DLH) available for each department for the same period has been estimated as follows:

 

Design

Machining

Assembly & Distribution

Direct Labour hours

10,000 DLH

12,500 DLH

20,000 DLH

The four product groups require direct labour hours in each of the departments as follows:

 

Design DLH

Machining DLH

Assembly & Distribution DLH

Total DLH

Liggles

2,000

1,500

10,000

13,500

Kicklets

3,000

1,000

5,000

9,000

Zonnets

3,000

7,000

2,000

12,000

Carttsos

2,000

3,000

3,000

8,000

The Accounting Department recently carried out an activity-based costing exercise that has determined the following cost pool and cost driver information for the business:

Cost pool

 

Cost driver

No. of drivers

Order entry

100,000

Customer orders

5,000

Production

350,000

Production orders

2,000

Delivery

150,000

Delivery orders

5,000

Analysis has also shown the number of cost drivers associated with each product:

 

Customer Orders

Production Orders

Delivery Orders

Liggles

1,500

500

1,000

Kicldets

500

1,000

1,000

Zonnets

1,000

250

1,000

Carusos

2,000

250

2,000

  1. Calculate the overhead per direct labour hour using a departmental rate.
  2. Calculate the total overhead cost allocated to each of the four product groups using the departmental rate.
  3. Calculate the costs per cost driver under activity-based costing.
  4. Calculate the total overhead cost allocated to each of the four product groups using activity-based costing.
  5. Comment on the approaches to costing and the differences between your answers to (b) and (d) above.

Jun 22 2020 View more View Less

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