Question

Describe the production characteristics (for example, high-volume, specialty, etc.) of the three products manufactured by Hydraulic Hoses, Inc. in our case study.

Describe the characteristics of products which would suggest it would be better to use ABC as an indirect cost allocation method over a traditional method such as direct labor hours.

Case Study:

Hydraulic Hoses, Inc. produces specialized industrial hoses for application such as high-pressure hydraulics and the transference of highly corrosive materials. The company recently implemented and ABC system for three of its products and is interested in evaluating its effectiveness before converting to an ABC system for thress of its products and is interested in evaulating its effectiveness before converting to an ABC system for all of its products. To perform this evaluation the company has compiled data for the three products using both the traditional system and the new ABC syste. The traditional system uses a single driver (direct materials costs). The ABC system uses a variety of cost drivers related to the activities used to produce the metal products. The three products involved in the trial run of the ABC system were D-13, K-17, and R-23. The following data relate to these products.

Product Selling Price Per Unit Units produced Total Costs Allocated Traditonal Costing Cost per Unit Traditonal Costing Total Cost allocated ABC Cost per Unit ABC

D-13 $14.65 250,000 $2,100,000 $8.40 $2,000,000 $8.00

K-17 15.60 140,000 1,280,000 9.14 1,235,000 8.82

R-23 18.50 20,000 214,500 10.73 369,500 17.98

Total 3,594,500 3,594,500

Answer 1

Use Activity Based Costing (ABC) is always better than traditional method of costing. This is because the ABC method takes into consideration the different cost activities and cost pols to allocate the overhead to the products. In comparison traditional costing method apportion the overhead on a predetermined basis based on either direct materials consumption for production of different products or use of direct labour. Thus, use of ABC method will result in better costing of products. Hence, the activity based costing method should be used to allocate the overhead in three different products produced by Hydraulic Hoses. Accordingly, D-13: Total cost allocated using ABC is $2,000,000 and per unit ABC is $8.00; K-17 Total cost allocated using ABC is $1,235,000 and per unit ABC is $8.82; and R-23: Total cost allocated using ABC is $369,500 and per unit ABC is $17.98.