Question: Traditional costing systems allocate overhead based on a standard unit-based measure that all products have in common (e.g. machine hours, processing time or direct labor hours) but these allocation measures assume all overhead costs are directly related to units produced. TER uses a standard allocation method for overhead of 400% of the direct labor costs. To produce 100000 units of product A requires $350000 of direct material and $80000 of direct labor costs. To produce 4000 units of product B requires $12000 in direct materials and $3750 in direct labor costs. Product A sells for $8 per unit and product B sells for $14 per unit.
Prepare a schedule calculating the cost per unit and gross margin per unit of product A and B, using TER's traditional costing system?
Prepare a schedule calculating the cost per unit and gross margin per unit of product A and B, using an activity-based costing approach?
Discuss circumstances in which an ABC system is cleary superior to a traditional accounting system. Under what circumstance would an ABC system be of little benefit?