The current manufacturing costing system of Goran Corporation has two direct cost categories (direct materials and direct labor). Indirect manufacturing costs are applied to products using a single indirect cost pool. The indirect manufacturing cost application is number of direct labor hours; the indirect cost rate is $120 per direct labor-hour.

Goran Corporation is changing from a labor-based to a machine based manufacturing approach at its aircraft components plant. The plant manager has set up five activity areas, each with its own supervisor and budget responsibility. Pertinent data follow:

                                               Cost Driver Used as Indirect             Cost per Unit

Activity Area                         Cost Application Base                                   Application Base

Materials handling                 Number of parts                                 $   0.70

Lathe work                             Number of turns                                      0.35

Milling                                    Number of machine hours                    15.00

Grinding                                 Number of parts                                      0.60

Shipping                                 Number of orders shipped               2,180.00

Information technology has advanced to the point where all the necessary data for budgeting in these five activity areas are automatically collected.

The two job orders processed under the new system at the aircraft components plant had the following characteristics:

                                                                       Job Order 101                        Job Order 102

Direct materials cost per job                          $45,300                                              $5,700

Direct labor cost per job                                $16,800                                              $1,400

Number of direct labor-hours per job                              420                                                     35

Number of parts per job                                     1,500                                                   600

Number of turns per job                                80,000                                              15,000

Number of machine hours per job                        750                                                      70

Number of job orders shipped                                               1                                                      1

Number of units in each job order                         450                                                    20

Required

1. Compute the per-unit manufacturing cost of each job under the existing manufacturing costing system; that is, indirect costs are collected in a single cost pool with labor-hours as the application base.
2. Assume that Goran adopts an ABC system. Indirect costs are applied to products using separate indirect cost pools for each of the five activity areas (materials handling, lathe work, milling, grinding, and shipping). The application base and rate for each activity area are described in the problem. Compute the per-unit manufacturing cost of each job under the ABC approach.
3. Explain the difference between the costs of the two products under the traditional costing system and activity based costing.

Answer rating: 100% (QA)

Solution Ans a Job Order 101 Job Order 102 Direct materials cost per job 45300 5700 Direct labor cos... View the full answer