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


Cost of purchased parts


Direct labor hours


Average direct labor pay rate


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.


Cost Driver

Activity Cost RateActivity Usage for

Kent Order

Engineering systems design

Engineering hours

$28.00 per engineering hour

18 engineering hours


Number of setups

$42.00 per setup

8 setups

Parts production

Machine hours

$37.50 per machine hour

84 machine hours


Assembly hours

$44.00 per assembly hour

36 assembly hours


Packaging hours

$28.50 per packaging hour

28 packaging hours

Building occupancy

Machine hours

$10.40 per machine hour

84 machine hours


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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