Modern Tools makes two types of chain saws High Grade and
Modern Tools makes two types of chain saws—High Grade and Professional. Data concerning these two product lines appear below
The company has a traditional costing system in which manufacturing overhead is applied to units based on direct labour-hours. Data concerning manufacturing overhead and direct labour-hours for the upcoming year appear below:
Estimated total manufacturing overhead. . . . . . . . . . . . . . . $1,350,000
Estimated total direct labour-hours. . . . . . . . . . . . . . . . . . . . 112,500 DLHs
Required:
1. Using Exhibit as a guide, compute the product margins for the High Grade and the Professional products under the company’s traditional costing system.
2. The company is considering replacing its traditional costing system with an ABC system that would assign its manufacturing overhead to the following four activity cost pools (the Other cost pool includes organization-sustaining costs and idle capacity costs):
Using Exhibit as a guide, compute the product margins for the High Grade and Professional products under the ABC system.
3. Explain why and how the traditional and activity-based cost assignments differ.
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