1) Predetermined overhead rate under traditional costing system:
=RM 33 per hour.
Actual labor hours for MXN = 35,000*0.10 hrs = 3,500 hrs
Actual labor hours for TXW = 15,000*2.10 hrs = 31,500 hrs
Overhead cost for MXN = 3500 Hrs * RM 33 /Hr = RM 115,500
Overhead cost for TXW = 31500 hrs * RM 33/Hr = RM 1,039,500
2)Calculation of unit product cost: (Under Traditional costing system)
|Manufacturing overhead rate/unit|| |
|Total cost per unit||RM 34.8||RM 137.6|
3) Calculation of unit product cost: (Under Activity Based Costing System)
Manufacturing overhead rate/unit
|Total cost per unit||RM 47.18||RM 108.22|
Workings: Calculation of overhead cost under activity based costing system:
|Activity cost pool||Estimated Overhead cost||MXN||TXW|
|Assembling Products(DLH)||RM 140,000|| |
|Preparing Batches(Batches)||RM 241,150|| |
|Axial Milling( Machine Hours)||RM 766,500|| |
|Total cost||RM 1,147,650||RM 548,800||RM 598,850|
4) Traditional Costing
Traditional costing adds an average overhead rate to the direct costs of manufacturing products. The overhead rate gets applied on the basis of a cost driver, such as number of labor hours required to make a product.
Companies usually use traditional costing for external reports, because it is simpler and easier for outsiders to understand. However, it does not give managers an accurate picture of product costs because the application of overhead burden rates is arbitrary and applied equally to the cost of all products. Overhead costs are not allocated to the products that actually consume the overhead activities.
The traditional costing method is best used for manufacturers that only make a few different products.
Activity-based costing identifies all of the specific overhead operations related to the manufacture of each product. Not all products require the support of all overhead costs, so it is not reasonable to apply the same overhead costs to all products.
Accountants created the ABC method to solve the problems of inaccuracy that result from the traditional costing approach.
Managers needed more accurate costing methods to determine which profits were actually profitable and which were not.
A fundamental difference between traditional costing and ABC costing is that ABC methods expand the number of indirect cost pools that can be allocated to specific products. The traditional method takes one pool of a company's total overhead costs to allocate universally to all products.