Traditional, Volume

Volume--Based Traditional, Volume

Volume--Based
Product--Costing System
Product Product--Costing System
Product
Mode I Mode II Mode III With these product costs, Aerotech established
Units produced 10,000 20,000 4,000
Direct labor (hr/unit) 3 4 2
target selling prices (Cost × 125%).
Total hours 30,000 80,000 8,000
Mode I Mode II Mode III
Direct materials $ 50.00 $ 90.00 $ 20.00
Total hours required 118,000
Direct labor 60.00 80.00 40.00
Manufacturing overhead 99.00 132.00 66.00
Total $ 209.00 $ 302.00 $ 126.00
Budgeted manufacturing overhead $3,894,000
= $33 per hour
Budgeted direct-
direct-labor hours 118,000

Mode I Mode II Mode III

Mode I Mode II Mode III Cost per unit $ 209.00 $ 302.00 $ 126.00
Direct labor (hr/unit) 3 4 2 Target selling price 261.25 377.50 157.50
Overhead rate per hour $ 33 $ 33 $ 33
Overhead per unit $ 99 $ 132 $ 66
209.00 x 1.25
5-1 5-2

STAGE ONE STAGE TWO

Calculate Budgeted Machinery Costs = $1,212,600
Various overhead the pool Budgeted Machine Hours 43,000
Maintenance Lubrication
costs related rate = $28.20/hour
to machinery Depreciation Electricity

Computer Support Calibration

Mode I: Mode II:

$28.20 per hr. $28.20 per hr.
1 hr. per unit 1.25 hr. per unit
Cost $28.20 per unit $35.25 per unit
Activity Assignment
cost Machinery Cost Pool
Mode III:
pool Total budgeted cost = $1,212,600 $28.20 per hr.
2 hr. per unit
$56.40 per unit

5-3 5-4

STAGE ONE STAGE TWO

Total budgeted setup cost Calculate Budgeted Setup Costs
Calculation of = $3,000
$20 per hour the pool Planned Production Runs 15 runs
total setup cost 10 hr. per setup rate = $200 per run
$200 cost per setup
15 production runs
$ 3,000 Total
Mode I: (1 Run) Mode II: (4 Runs)
$200 per run $200 per run
10,000 units per run 5,000 units per run
Cost = $.02 per unit = $.04 per unit
Activity Assignment
cost Setup Cost Pool Mode III: (10 Runs)
pool Total budgeted cost = $3,000 $200 per run
400 units per run
= $.50 per unit

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 STAGE ONE STAGE TWO
Various overhead Engineering salaries Engineering software Allocate based
costs related
Engineering Cost Pool
on engineering
to engineering Engineering supplies Depreciation Total budgeted cost = $700,000
transactions

Mode I: Mode II:

25% × $700,000 45% × $700,000
10,000 units 20,000 units
Activity = $17.50 per unit = $15.75 per unit
Engineering Cost Pool Cost
cost
Total budgeted cost = $700,000 Assignment
pool Mode III:
30% × $700,000
4,000 units
= $52.50 per unit

5-7 5-8

STAGE ONE STAGE TWO

Various overhead Plant depr. Property taxes
costs related Calculate Budgeted Facilities Cost
Plant mgmt. Insurance = $507,400
to general the pool Budgeted Direct-Labor Hours 118,000
operations Plant maint. Security rate = $4.30/hour

Mode I: Mode II:

$4.30 per hr. $4.30 per hr.
× 3 hr. per unit × 4 hr. per unit
Activity $12.90 per unit $17.20 per unit
Facility Cost Pool Cost
cost
pool Total budgeted cost = $507,400 Assignment
Mode III:
$4.30 per hr.
× 2 hr. per unit
$8.60 per unit

5-9 5-10

Other Overhead Costs Product Cost from ABC

Receiving and Inspection Cost Pool
Board Overhead × % ÷ Units = Cost/Unit These are the new product costs when
Mode I $ 621,000 × 6% ÷ 10,000 = $ 3.73
Mode II 621,000 × 24% ÷ 20,000 = 7.45 Aerotech uses ABC.
Mode III 621,000 × 70% ÷ 4,000 = 108.68

Material-Handling Cost pack and shipping Pool Mode I Mode II Mode III
Board Overhead × % ÷ Units = Cost/Unit
Mode I $ 850,000 × 7% ÷ 10,000 = $ 5.95
Direct materials $ 50.00 $ 90.00 $ 20.00
Mode II 850,000
, × 30% ÷ 20,000
, = 12.75 Direct labor 60.00 80.00 40.00
Mode III 850,000 × 63% ÷ 4,000 = 133.88
Machinery 28.20 35.25 56.40
Setup 0.02 0.04 0.50
Engineering 17.50 15.75 52.50
Facilities 12.90 17.20 8.60
Other 9.68 20.20 242.56
Total $ 178.30 $ 258.44 $ 420.56

5-11 5-12
 Distorted Product Costs Distorted Product Costs
Both original and ABC target selling prices are
Can you identify any problems Aerotech is likely
based on (Cost × 125%).
to face as a result of this distortion?
Mode I Mode II Mode III Mode I Mode II Mode III
Traditional costing $ 209.00 $ 302.00 $ 126.00
Traditional costing $ 209.00 $ 302.00 $ 126.00
ABC costing 178.30 258.44 420.56
ABC costing
i 178.30
178 30 258 44
258.44 420 56
420.56
Original target selling price 261.25 377.50 157.50 Cost distortion per unit 30.70 43.56 (294.56)
ABC target selling price 222.88 323.05 525.70 Units produced 10,000 20,000 4,000
Total cost distortion 307,000 871,200 (1,178,240)

The selling price of Mode I and II are reduced

and the selling price for Mode III is increased. Traditional costing understates the cost
of complex, low volume products.
[$209.00 × 1.25] [$183.44 × 1.25]

5-13 5-14