Comparing Two Products under Traditional and Activity-Based Costing

Compare two projects under development by the same company. The following are a few aspects of each product's development process relevant to costs.

Product S		Product T
Requires 3,200 hours of testing		Requires 800 hours of testing
Requires 4,200 units of computing power		Requires 1,800 units of computing power
Requires 25 developer hours to implement		Requires 75 developer hours to implement

Cost Items	Cost of Each Activity
Testing:	$28,800
Computing power:	$43,200
Developer hourly cost:	$15 per hour

Traditional Costing

Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing. In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project. If required, round your answers to the nearest dollar.

Product S		Product T
Percentage of developer hours	25%		Percentage of developer hours	75%
Testing cost			Testing cost
Computing cost			Computing cost
Developer cost			Developer cost
Total cost			Total cost

Percentage of developer hours

+ Percentage of developer hours for Product S (25%)

Allocation basis for Product S: The amount of labor hours associated directly with Product S, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product S under the traditional costing method.

25

(25+75)

+ Percentage of developer hours for Product T (75%)

Allocation basis for Product T: The amount of labor hours associated directly with Product T, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product T under the traditional costing method.

75

(25+75)

Review the resources each product (S and T) requires for production and compare that to the costs calculated above under traditional costing. Does traditional costing serve as an accurate gauge of costs?

Activity-Based Costing

Using the data above for products S and T, calculate the costs using activity-based costing. Allocate the costs of testing, computing, and development based on the rates of activity consumed by each product's development process. If required in your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar.

Cost	Activity Base
Testing	Hours of testing
Computing cost	Units of computing power
Developer cost	Development hours

Product S		Product T
Testing cost			Testing cost
Computing cost			Computing cost
Developer cost			Developer cost
Total cost			Total cost