Question

# Traditional vs. Activity Based Costing – Chapter 7 Job A requires \$5,600 of direct material and...

1. Traditional vs. Activity Based Costing – Chapter 7

Job A requires \$5,600 of direct material and \$3,500 of Direct Labor to produce. We use 100 direct labor hours to produce Job A. Job A requires 4 machine setups and 20 testing hours.

We estimate manufacturing overhead to be \$1,020,000 for the next year and we expect to have 40,000 direct labor hours used in our manufacturing plant.

Currently we use Traditional Costing for costing our products.

1. Compute the POHR
2. What amount of overhead should be applied to Job A using Traditional Costing?
3. What is the total product cost of Job A using Traditional Costing?

Ans:

In case of Traditional Costing method, Overhead are applied to a job based on number of direct labor hours required for the Job.

1.

Manufacturing overhead/ Total direct labor hours = \$1,020,000/40,000 = \$25.50

2.

Amount of overhead should be applied to Job A using Traditional Costing:

Direct Labor Hours * Overhead rate per hour = 100 * \$25.50 = \$2,550

3.

Total product cost of Job A using Traditional Costing:

Direct Material : \$5,600

Direct Labor cost : \$3,500

Total Cost = \$5600 + \$3500 + \$2550 = \$11,650

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