Company A manufactures a line of high-end exercise equipment
of commercial quality. Assume that the Controller has proposed
changing from a traditional costing system to an activity-based
costing system. The Vice-President Finance is not convinced, so she
requests that the next large order for equipment be costed under
both systems to compare and analyze. The company receives an order
from Slim Inc, for 150 low impact treadmills, which the Controller
identifies as the order to use for dual costing. The following cost
data relate to the Slim Inc order:
Data Relevant to Both Costing Systems:
Direct materials $55,500
Direct labour hours 820
Direct labour rate per hour $18
Data Relevant to the Traditional Costing System:
The predetermined overhead rate is 300% of direct labour
cost.
Data Relevant to the Activity-Based costing System:
Activity Cost Pools Cost Drivers Activity-Based Expected Use
of
Overhead Rate Cost Drivers
Per Treadmill
Engineering design Engineering hours $30 per hour 330
Machine set-up Set-ups $200 per set-up 22
Machining Machine hours $25 per hour 732
Assembly Number of sub- $8 per sub- 1,450
assemblies assembly
Packaging & Packaging & $15 per hour 152
Shipping hours
Building occupancy Machine hours $6 per hour 732
Required:
Calculate the total cost of the Slim Inc order under
The traditional costing system
The activity-based costing system
As a result of this comparison which costing System Company A
likely to adopt? And why?