Activities and Activity-Based CostingFraser Products, Inc.

Activities and Activity-Based Costing

Fraser Products, Inc., which produces copy machines for wholesale distributors in the Pacific Northwest, has just completed packaging an order from Kent Company for 150 Model 14 machines. Fraser recently switched from a traditional system of allocating costs to an activity-based costing system. Before the Kent order is shipped, the controller wants a unit cost analysis comparing the amounts computed under the traditional costing system with those computed under the ABC system. Direct materials, purchased parts, and direct labor costs for the Kent order are as follows.

Cost of direct materials

$17,450.00

Cost of purchased parts

$14,800.00

Direct labor hours

140

Average direct labor pay rate

$16.50

Other operating costs are as follows:

Traditional costing data:

Overhead costs were applied at a single, plant wide overhead rate of 240 percent of direct labor dollars.

Activity-based costing data.

Activity

Cost Driver

Activity Cost RateActivity Usage for

Kent Order

Engineering systems design

Engineering hours

$28.00 per engineering hour

18 engineering hours

Setup

Number of setups

$42.00 per setup

8 setups

Parts production

Machine hours

$37.50 per machine hour

84 machine hours

Assembly

Assembly hours

$44.00 per assembly hour

36 assembly hours

Packaging

Packaging hours

$28.50 per packaging hour

28 packaging hours

Building occupancy

Machine hours

$10.40 per machine hour

84 machine hours

Required

1. Using the traditional costing approach, compute the total cost of the Kent order.

2. Using the activity-based costing approach, compute the total cost of the Kent order.

3. Manager Insight: What difference in the amount of cost assigned to the Kent order resulted from the shift to activity-based costing? Does the use of activity-based costing guarantee cost reduction for every product?

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