P4-43A Comprehensive ABC (Learning Objectives 2 & 3)

Halo Systems specializes in servers for work-group, e-commerce, and enterprise resource planning (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 $24 per direct labor hour.

A task force headed by Halo’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 $ 0.90 Machine setup.................................................. Number of setups $ 510.00 Assembling....................................................... Assembling hours $ 70.00 Shipping........................................................... Number of shipments $ 1,600.00 Halo 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.................................................................... 16,000 2,100 Number of setups................................................................. 6 4 Number of assembling hours................................................ 1,600 220 Number of shipments........................................................... 1 1 Total direct labor hours......................................................... 9,000 700 Number of output units........................................................ 100 10 Direct materials cost.............................................................. $220,000 $40,000 Direct labor cost.................................................................... $175,000 $18,000 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 Halo 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 Halo for $5,700 per output unit. Halo may outsource (buy from the outside company) Job A only, Job B only, or both jobs. Which course of action will Halo’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.