Refer to Exhibit 14.3. One of the primary purposes of an ABC system is to increase the accuracy of product costs so that managers can make better cost-based decisions. Assume that you are a manager at Dell and that you have to determine prices for computers by adding a markup to the cost accumulated by the costing system. For example, if the accumulated total job cost is €800, a markup sufficient to ‘cover’ all unallocated costs and provide a reasonable profit is added. Using the table on p. 639, determine whether the percentage markup under the ABC system is higher or lower than under the previous system. Which system gives you a higher degree of confidence that the price for a computer is adequate to cover all costs and provide a reasonable profit? Why?

Exhibit 14.3

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RESEARCH AND DEVELOPMENT All activities are indirect PRODUCT DESIGN All activities are indirect PRODUCTION Direct material, factory overhead MARKETING All activities are indirect DISTRIBUTION All activities are indirect CUSTOMER SERVICE All activities are indirect ABC ABC ABC ABC ABC ABC LINE OF BUSINESS All ABC allocations of budgeted indirect costs are first made to the line of business based on the line's consumption of the related cost drivers. Then, a budgeted overhead application rate is determined using the following formula: Total ABC allocations + Total budgeted units Budgeted overhead application rate INDIVIDUAL JOB Direct materials overhead applied [OH Rate x No. of units ordered] Total cost of job SALES Total job cost (Sxxx) + markup €XXX XXX €XXX 1