PRACTICE PROBLEM in Activity-Based Costing

1.Compute the manufacturing cost per unit for each job under the previous simple job-costing
system.
  Job 410 Job 411
Direct manufacturing costs:      
Direct materials ₱ 9,700   ₱ 59,900  
Direct manufacturing labor (P15 x 25); (P15
375 ₱ 10,075 5,625 ₱ 65,525
x 375)
Indirect manufacturing costs (P115 x 25);
2,875 43,125
(P115 x 375)
Total manufacturing costs ₱ 12,950 ₱108,650
Divided by number of units per job 10 200
Manufacturing costs per unit ₱ 1,295 ₱ 543
 

2. Compute the manufacturing cost per unit for each job under the activity-based costing
system.
  Job 410 Job 411
Direct manufacturing costs:    
Direct materials ₱ 9,700   ₱ 59,900  
Direct manufacturing labor (P15 x 25); (P15
375 ₱ 10,075 5,625 ₱ 65,525
x 375)
Indirect manufacturing costs:    
Materials handling (P0.40 x 500);
200 800  
(P0.40 x 2,000)
Lathe work (P0.20 x 20,000); (P0.20 x
4,000   11,850  
59,250)
Milling (P20 x 150); (P20 x 1,050) 3,000   21,000  

Grinding (P0.80 x 500); (P0.80 x 2,000) 400   1,600  

Testing (P15 x 10); (P15 x 200) 150 7,750 3,000 38,250

Total manufacturing costs 17,825

103,775
Divided by number of units per job 10 200
Manufacturing costs per unit ₱ 1,783 ₱ 519
 

3. Compare the per-unit cost figures for Jobs 410 and 411 computed in requirements 1 and 2.
Why do the simple and the activity-based costing systems differ in the manufacturing cost per
unit for each job?
  Job 410 Job 411
Number of units in specific job 10 200
Manufacturing costs per unit (job-order costing) ₱ 1,295 ₱ 543
Manufacturing costs per unit (activity-based costing) 1,783 519
Difference (ABC vs. JOB ORDER) 488 (24)
In percentage (%) 37.64% -4.49%

Using activity-based costing, the manufacturing unit cost of Job 410 is P488 higher which
is equivalent to 37.64% than in job order costing. On the other hand, the computed
manufacturing cost per unit on Job 411 is P24 or 4.49% lower than job order costing.
The unit product costs computed in requirements 1 and 2 differ due to the use of five
activity areas used in ABC costing whereas each of these activity areas uses different
indirect cost allocation bases while in job order costing, it only makes use of the
manufacturing labor-hours as the indirect cost allocation base.
These differences happened because when activity-based costing is used, low-volume
products have higher reported product costs while high-volume products have lower
production costs. The costs per activity area most likely vary since each of them have a
specific cost-allocation base or cost drivers while in a job-order costing system, only one
cost driver is being used.

4. How might Baratuhun Corporation use information from its ABC system to better manage its
business?
The results computed in requirements 1 and 2 denote that if the Baratuhun Company uses
a traditional costing system which is the job order costing, then the product cost of Job 410
will be understated while the product cost of Job 411 will be overstated. These differences
in product costs are important in setting prices for the products and other operational and
management decisions of the business. An activity-based costing system is more efficient
for companies because the overhead costs are allocated accurately and are not distributed
evenly across all the products. The different activity areas determined can help Baratuhun
Corporation to manage them well and traced it to know why each of these is affecting the
costs of the products.