A COMPARISON BETWEEN A TRADITIONAL WITH ABC SYSTEM

Sam’s Inc. produces 2 products: Nice and Cool with the same equipment & process. The products
differ by volume. Nice is a high volume product while Cool is a low volume products. Details of
productions are as follows:

Machine DLH/ Annual Total Total No of purchase NO of

hours/unit unit output (units) MH DLH orders set-ups

Cool 2 4 1.000 2.000 4.000 80 40

Nice 2 4 10.000 20.000 40.000 160 60
11.000 22.000 44.000 240 100

The cost of activities is as follows:

($)
Volume-related 110.000
Purchasing-related 120.000
Set-up-related 210.000
440.000

a. Traditional Costing System

Costs center allocated costs $440.000
Overhead rate per machine hour $20
Overhead rate per direct labor hour $10
Cost per unit: Cool $40
Nice $40
Total allocated to products: Cool $40.0000
Nice $400.000

b. ABC System
Activities
Volume-related Purchasing-related Set-up related

Cost traced to activities $110.000 $120.000 $210.000

Consumption of 22.000 240 100
activities (cost drivers)
Cost per unit of $5 $500 $2.100
consumption
Cost traced to products:
Cool $10.000 $40.000 $84.000
Nice $100.000 $80.000 $126.000

Cost per products:

Cool = $134.000/$1.000= $134
Nice = $306.000/10.000=$30.6