Problem:
(ABC; pricing) Skagway Co. has identified activity centers to which over-head costs are assigned. The cost pool amounts for these centers and their selected activity drivers for 2010 follow.
|
Activity Centers
|
Costs
|
Activity Drivers
|
|
Utilities
|
$1,800,000
|
90,000 machine hours
|
|
Scheduling and setup
|
1,638,000
|
1,170 setups
|
|
Material handling
|
3,840,000
|
2,400,000 pounds of material
|
The company's products and other operating statistics follow.
|
|
PRODUCTS
|
|
|
A
|
B
|
C
|
|
Direct costs
|
$120,000
|
$120,000
|
$135,000
|
|
Machine hours
|
45,000
|
15,000
|
30,000
|
|
Number of setups
|
195
|
570
|
405
|
|
Pounds of material
|
750,000
|
450,000
|
1,200,000
|
|
Number of units produced
|
60,000
|
30,000
|
90,000
|
|
Direct labor hours
|
48,000
|
27,000
|
75,000
|
a. Determine unit product cost using the appropriate cost drivers for each product.
b. Before it installed an ABC system, the company used a traditional costing sys-tem that allocated factory overhead to products using direct labor hours. The firm operates in a competitive market and sets product prices at cost plus a 25 percent markup.
1. Calculate unit costs based on traditional costing. (Round to the nearest cent.)
2. Determine selling prices based on unit costs for traditional costing and for ABC.(Round to the nearest cent.)
c. Discuss the problems related to setting prices based on traditional costing and explain how ABC improves the information.