Question

Fairchild Inc. manufactures televisions that are designed for use in sports bars. The company has budgeted manufacturing overhead costs for the year as follows:
Type of Cost Cost Pools
Electric power .........$2,500,000
Inspection ...........1,500,000

Under a traditional cost system, the company estimated the budgeted capacity for machine hours to be 40,000 hours. The company is considering changing to an activity-based cost system. As part of its consideration of the new costing system, the company developed the following estimates:
Type of Cost Activity-Based Cost Drivers
Electric power ....... 50,000 kilowatt hours (KWH)
Inspection ......... 10,000 inspections (INSP)

The following information related to the production of 2,000 units of Model #1003 was accumulated:
Direct materials cost ......... $50,000
Direct labor costs ......... $75,000
Machine hours .......... 10,000
Direct labor hours .......... 5,000
Electric power—kilowatt hours ... 20,000
Number of inspections ....... 1,000
Based on the data, Fairchild’s accounting department provided management with the following report:


Activity-Based Costing System Estimate:


Required
A. Explain the difference between activity-based costing and traditional costing and describe how ABC might enhance the financial reporting of Fairchild.
B. If Fairchild were setting a sales price based on a 20 percent markup, how would profit be affected if the company did not change to an ABCsystem?


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  • CreatedMarch 11, 2015
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