Wellington Company manufactures custom-designed pens. Previously, the company has been using a traditional overhead allocation system based solely on direct labuor-hours. However, the company’s top management thought that the traditional overhead allocation system was distorting costs and selling prices. Hence, it has decided to switch to an activity-based costing system using. The company provides the following information: Activity cost pool Total cost Total activity Labour related $30,000 10,000 direct labour hours Machine related $40,000 8,000 machine hours Quality control $10,000 1,000 inspections Others $32,000 N/A The company has recently completed a job (Job #24) that required producing 1,000 pens. It incurred $1,200 direct material, 20 hours of direct labour at $50 per hour, 120 machine hours, and 7 inspections to complete the job. Required (show your calculations): a. Prepare a report showing the cost of Job #24 using the activity-based costing system. b. Do you think that the cost of the Job #24 is higher in the activity-based costing system than the traditional costing system? Explain your answers.
Variance Analysis
In layman's terms, variance analysis is an analysis of a difference between planned and actual behavior. Variance analysis is mainly used by the companies to maintain a control over a business. After analyzing differences, companies find the reasons for the variance so that the necessary steps should be taken to correct that variance.
Standard Costing
The standard cost system is the expected cost per unit product manufactured and it helps in estimating the deviations and controlling them as well as fixing the selling price of the product. For example, it helps to plan the cost for the coming year on the various expenses.
Wellington Company manufactures custom-designed pens. Previously, the company has been
using a traditional
company’s top management thought that the traditional overhead allocation system was
distorting costs and selling prices. Hence, it has decided to switch to an activity-based costing
system using. The company provides the following information:
Activity cost pool Total cost Total activity
Labour related $30,000 10,000 direct labour hours
Machine related $40,000 8,000 machine hours
Quality control $10,000 1,000 inspections
Others $32,000 N/A
The company has recently completed a job (Job #24) that required producing 1,000 pens. It
incurred $1,200 direct material, 20 hours of direct labour at $50 per hour, 120 machine hours,
and 7 inspections to complete the job.
Required (show your calculations):
a. Prepare a report showing the cost of Job #24 using the activity-based costing system.
b. Do you think that the cost of the Job #24 is higher in the activity-based costing system than
the traditional costing system? Explain your answers.
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