Compare two projects under development by the same company. The following are a few aspects of each product’s development process relevant to costs.
| Product A | Product B | |
| Requires 3,680 hours of testing | Requires 920 hours of testing | |
| Requires 5,390 units of computing power | Requires 2,310 units of computing power | |
| Requires 20 developer hours to implement | Requires 80 developer hours to implement | |
|
Traditional Costing
Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing. In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project If required, round your answers to the nearest dollar.
| Product A | Product B | |||
| Percentage of developer hours | 20% | Percentage of developer hours | 80% | |
| Testing cost | $ | Testing cost | $ | |
| Computing cost | $ | Computing cost | $ | |
| Developer cost | $ | Developer cost | $ | |
| Total cost | $ | Total cost | $ | |
Seeing how many resources each product (A and B) requires for production compared to the costs calculated under traditional costing, does traditional costing serve as an accurate gauge of costs?
Activity-Based Costing
Using the data above for products A and B, calculate the costs using activity-based costing. Allocate the costs of testing, computing, and development based on the rates of activity consumed by each product’s development process. If required, in your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar.
| Cost | Activity Base |
| Testing | Hours of testing |
| Computing cost | Units of computing power |
| Developer cost | Development hours |
| Product A | Product B | |||
| Testing cost | $ | Testing cost | $ | |
| Computing cost | $ | Computing cost | $ | |
| Developer cost | $ | Developer cost | $ | |
| Total cost | $ | Total cost | $ | |
Activity-based costing for varying batch production
A manufacturing company has the following two activities associated with completion of products:
The setting up of machines for running batches of products
The actual production of units produced
The company has annual manufacturing overhead costs of $2,000,000, of which $200,000 is directly involved in setting up machines for batch runs. During the year, the company expects to perform 400 machine setups, one setup per batch for a total of 400 batches of production. Assume that the batch sizes vary considerably, but the work involved in setting up the machines is not appreciably different from one job to the next.
If the company estimates that the $200,000 costs associated with setups will yield 400 setups this year, the cost associated directly with each setup will be $ per setup. Because each job will require its own setup, setup costs are viewed as batch costs. Because $200,000 of the $2,000,000 are costs associated with setups, this means that costs associated directly with the production of units equal $.
