Yoko Iwabuchi is the controller of Kondo, Inc., an electronic controls company located in Osaka. She recently attended a seminar on activity-based costing (ABC) in Tokyo. Kondo’s traditional cost accounting system has three cost categories: direct materials, direct labor, and indirect production costs. The company allocates indirect production costs on the basis of direct-labor cost. The following is the 20X0 budget for the automotive controls department (in thousands of Japanese yen):
Direct materials ...... ¥ 55,000
Direct labor ......... 28,368
Indirect production costs .. 21,276
Total cost ....... ¥104,644

After Ms. Iwabuchi attended the seminar, she suggested that Kondo experiment with an ABC system in the Automotive Controls Department. She identified four main activities that cause indirect production costs in the department and selected a cost driver as a cost-allocation base for each activity as follows:

In 20X0 the Automotive Controls Department expects to produce 99,000 control units, use 560 quality control hours, and ship 8,300 boxes.
1. Explain how Kondo, Inc., allocates its indirect production costs using its traditional cost system. Include a computation of the allocation rate used.
2. Explain how Kondo, Inc., would allocate indirect production costs under Ms. Iwabuchi’s proposed ABC system. Include a computation of all the allocation rates used.
3. Suppose Kondo prices its products at 40% above total production cost. An order came in from Mazda for 9,000 control units. Iwabuchi estimates that filling the order will require ¥4,500,000 of direct-materials cost and ¥1,800,000 of direct labor. It will require 60 hours of QC inspection time and will be shipped in 670 boxes.
a. Compute the price charged for the 9,000 control units if Kondo uses its traditional cost accounting system.
b. Compute the price charged for the 9,000 control units if Kondo uses the ABC system proposed by Ms. Iwabuchi.
4 Explain why costs are different in the two costing systems. Include an indication of which costs you think are most accurate andwhy.

  • CreatedNovember 19, 2014
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