Axis Systems specializes in servers for work-group, e-commerce, and ERP applications. The company's original job cost system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of $22 per direct labor hour. A task force headed by Axis's CFO recently designed an ABC system with four activities. The ABC system retains the current system's two direct cost categories. Thus, it budgets only overhead costs for each activity. Pertinent data follow:
Activity Allocation Base Cost Allocation Rate
Materials handling . . . . . . . . . . . . . . . . . . . . . Number of parts...........$ 0.85
Machine setup . . . . . . . . . . . . . . . . . . . . . . . . Number of setups.........500.00
Assembling . . . . . . . . . . . . . . . . . . . . . . . . . . Assembling hours.........80.00
Shipping . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of shipments..1,500.00
Axis Systems has been awarded two new contracts that will be produced as Job A and Job B. Budget data relating to the contracts follow:
Job A Job B
Number of parts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,000................2,000
Number of setups . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6............................4
Number of assembling hours . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,500....................200
Number of shipments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1............................1
Total direct labor hours . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,000...................600
Number of output units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100.........................10
Direct materials cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $210,000.........$30,000
Direct labor cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $160,000.........$12,000
Requirements
1. Compute the product cost per unit for each job using the original costing system (with two direct cost categories and a single overhead allocation rate).
2. Suppose Axis Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
4. A dependable company has offered to produce both jobs for Axis for $5,400 per output unit. Axis may outsource (buy from the outside company) Job A only, Job B only, or both jobs. Which course of action will Axis's managers take if they base their decision on
(a) The original system?
(b) ABC system costs? Which course of action will yield more income? Explain.