A company is considering the adoption of activity-based costing (ABC) system because the managers suspect that their traditional costing system distorts the product costs. This company produces and sells two products Standard and Deluxe. Their traditional costing system uses machine hours (MHs) as the allocation base for manufacturing overhead costs. The production managers decided that the major activities are Assembly, Machine setups, and Parts administration and determine the costs for each activity. They also identified how many MHs, setups, and parts each product requires.

Additional information:

Standard Deluxe

Price $120 per unit $150 per unit
Costs:
Direct materials $32 per unit $36 per unit
Direct labor (DL) $15 per unit $25 per unit

Units produced 250,000 units 100,000 units

Activity
Assembly (MHs) 100,000 MHs 200,000 MHs

Machine setups (setups) 100 setups 400 setups

Parts administration (part types) 200 parts 200 parts

Overhead Costs
Assembly $1,200,000
Machine setups $600,000
Parts administration $300,000

Compared with the unit product cost calculated by the ABC system, what is the distortion (difference) created by the traditional costing system for Deluxe Product?

The company is assumed to spend equal money on customer relations among its two customers A and B.
Total costs of customer relations for these two customers are $10,000. Customer A placed an order as
below. Using the ABC system, the customer margin of customer A is (choose the closest answer):
Standard 100 units
Deluxe 200 units

Answer rating: 100% (QA)

In case of Deluxe product as per traditional system the allocable overhead 12900000 300000 MHs 20000... View the full answer