Learning Objective

Understand just how to usage the five steps that activity-based costing to recognize product costs.

Question: expect the managers at SailRite company decide the the services of implementing one activity-based costing mechanism would exceed the cost, and also thus the firm should usage activity-based costing to allocate overhead. What room the 5 steps the activity-based costing, and also how would this an approach work because that SailRite?

 

Answer: Activity-based costing (ABC)A method of costing that supplies several expense pools, and therefore numerous predetermined overhead rates, arranged by activity to clues overhead costs. Provides several cost pools, arranged by activity, to allocate overhead costs. (Remember the plantwide allocation provides one expense pool because that the whole plant, and department allocation offers one cost pool because that each department.) The idea is that tasks are required to develop products—activities such as purchasing materials, setup up machinery, assembling products, and inspecting perfect products. These tasks can it is in costly. Therefore the cost of activities should be allocated come products based on the products’ use of the activities.

You are watching: A well designed activity based costing system starts with


ABC in activity at SailRite Company

Five procedures are compelled to carry out activity-based costing. As you work through the instance for SailRite Company, once again keep in mind that complete estimated overhead costs remain at $8,000,000. However, the full is broken out into different activities fairly than departments, and also an overhead rate is created for each activity. The 5 steps are as follows:

 

Step 1. Identify costly activities required to finish products.

An activityAny process or procedure that consumes overhead resources. Is any process or procedure that consumes overhead resources. The score is to recognize all the tasks required to make the this firm products. This needs interviewing and also meeting v personnel throughout the organization. Carriers that usage activity-based costing, such together Hewlett Packard and also IBM, may identify hundreds of activities required to do their products. The most difficult part the this action is narrowing under the activities to those that have actually the biggest impact on overhead costs.

After meeting through personnel throughout the company, SailRite’s accountant figured out the following tasks as having actually the biggest influence on overhead costs:

purchase materials setup up makers Running machines Assembling commodities Inspecting finished assets

 

Step 2. Assign overhead costs to the tasks identified in action 1.

This step requires that overhead costs associated with each activity be assigned come the task (i.e., a cost pool is created for each activity). For SailRite, the cost pool because that the purchase materials task will include costs for items together as incomes of purchasing personnel, rent for purchasing department office space, and also depreciation of purchasing office equipment.

The accountant at SailRite arisen the adhering to allocations after cautious review of all overhead prices (remember, these room overhead costs, not straight materials or straight labor costs):


*

*We must note the this is no the straight labor cost. Instead, this represents overhead costs associated with assembling products, such together supplies and also the factory room being provided for assembly.


At this point, we have figured out the many important and also costly activities required to make products, and we have actually assigned overhead costs to every of these activities. The following step is to find an allocation base the drives the expense of each activity.

 

Step 3. Identify the expense driver for each activity.

A cost driverThe activity that causes the costs linked with one activity. Is the action that causes (or “drives”) the costs associated with the activity. Identifying expense drivers calls for gathering information and also interviewing an essential personnel in various areas of the organization, such together purchasing, production, high quality control, and also accounting. After mindful scrutiny of the procedure required because that each activity, SailRite developed the following price drivers:


Activity Cost Driver Estimated yearly Cost Driver Activity
Purchasing materials Purchase requisitions 10,000 requisitions
Setting increase machines Machine setups 2,000 setups
Running machines Machine hours 90,000 hours
Assembling products Direct labor hours 250,000 hours
Inspecting finished products Inspection hours 20,000 hours

Notice that this information consists of an estimate of the level of task for each cost driver, i m sorry is required to calculation a predetermined price for each task in action 4.

 

Step 4. Calculate a predetermined overhead rate for every activity.

This is done by dividing the approximated overhead costs (from step 2) through the approximated level of cost driver task (from action 3). Number 3.4 "Predetermined Overhead rates for SailRite Company" offers the overhead rate calculations because that SailRite company based ~ above the information displayed in the previous three steps. It shows that assets will be charged $120 in overhead prices for each acquisition requisition processed, $800 for each machine setup, $30 because that each an equipment hour used, $6 for each direct labor hour worked, and $50 because that each hour of investigate time.


Figure 3.4 Predetermined Overhead prices for SailRite Company

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Step 5. Clues overhead costs to products.

Overhead costs are allocated to products by multiply the predetermined overhead price for each activity (calculated in step 4) by the level of cost driver task used through the product. The term applied overhead is often used to explain this process.

Assume the following yearly cost driver task takes ar at SailRite for the simple and deluxe sailboats:Notice that the total activity levels gift here match the estimated task levels gift in action 4. This to be done to protect against complicating the example with overapplied and also underapplied overhead. However, a an ext realistic scenario would provide actual activity levels that are different than estimated task levels, thereby developing overapplied and also underapplied overhead because that each activity. We explained the disposition of overapplied and also underapplied overhead in chapter 2 "How Is project Costing used to Track manufacturing Costs?".


Activity Basic Sailboat Deluxe Sailboat Total
Purchasing materials 7,000 requisitions 3,000 requisitions 10,000 requisitions
Setting increase machines 1,100 setups 900 setups 2,000 setups
Running machines 50,000 hours 40,000 hours 90,000 maker hours
Assembling products 200,000 hours 50,000 hours 250,000 direct labor hours
Inspecting perfect products 12,000 hours 8,000 hours 20,000 investigate hours

Figure 3.5 "Allocation that Overhead costs to commodities at SailRite Company" reflects the allocation that overhead using the expense driver task just presented and the overhead rates calculated in number 3.4 "Predetermined Overhead rates for SailRite Company". Notification that allocated overhead costs total $8,000,000. This is the same cost figure supplied for the plantwide and also department allocation techniques we questioned earlier. Activity-based costing simply gives a an ext refined means to point out the same overhead costs to products.


Figure 3.5 Allocation of Overhead expenses to products at SailRite Company

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*Overhead allocated equals the predetermined overhead rate times the price driver activity.

**Overhead expense per unit because that the straightforward model amounts to $5,020,000 (overhead allocated) ÷ 5,000 systems produced, and also for the deluxe model, it amounts to $2,980,000 ÷ 1,000 systems produced.


The bottom of figure 3.5 "Allocation the Overhead prices to commodities at SailRite Company" mirrors the overhead price per unit for each product suspect SailRite produce 5,000 systems of the basic sailboat and also 1,000 systems of the deluxe sailboat. This information is required to calculate the product expense for every unit that product, i beg your pardon we discuss next.


Product prices Using the Activity-Based Costing method at SailRite

Question: As displayed in figure 3.5 "Allocation that Overhead costs to assets at SailRite Company", SailRite to know the overhead price per unit using activity-based costing is $1,004 for the simple model and also $2,980 because that the Deluxe. Now the SailRite has actually the overhead expense per unit, exactly how will the agency find the complete product cost per unit and also resulting profit?

 

Answer: Recall native our discussion earlier that the calculation of a product’s price involves 3 components—direct materials, direct labor, and manufacturing overhead. Assume direct materials cost $1,000 for the simple sailboat and $1,300 for the Deluxe. Direct labor prices are $600 for the basic sailboat and also $750 for the Deluxe. This information, linked with the overhead expense per unit calculated in ~ the bottom of number 3.5 "Allocation of Overhead prices to assets at SailRite Company", gives us what we need to identify the product cost per unit because that each model, i beg your pardon is presented in number 3.6 "SailRite agency Product prices Using Activity-Based Costing". The mean sales price is $3,200 for the basic model and $4,500 because that the Deluxe. Using the product expense information in number 3.6 "SailRite firm Product costs Using Activity-Based Costing", the an easy model yields a benefit of $596 (= $3,200 price – $2,604 cost) per unit and the Deluxe version yields a loss that $530 (= $4,500 price – $5,030 cost) every unit.


Figure 3.6 SailRite agency Product expenses Using Activity-Based Costing

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As you can see in figure 3.6 "SailRite firm Product costs Using Activity-Based Costing", overhead is a significant component of full product costs. This explains the need for a sleek overhead allocation device such as activity-based costing.


Comparison of alphabet to Plantwide Costing at SailRite

After going through the process of allocating overhead utilizing activity-based costing, man Lester (the company accountant) called a meeting through the exact same management team introduced at the beginning of the chapter: Cindy room (CEO), mary McCann (vice chairman of marketing), and Bob Schuler (vice chairman of production). As you review the following dialogue, express to figure 3.7 "Activity-Based Costing versus Plantwide Costing at SailRite Company", which summarizes John’s findings.


Cindy: What perform you have for us, John?
John: I think you’ll uncover the outcomes of our most recent costing analysis very interesting. Us used strategy called activity-based costing to allocate overhead to products.
Bob: I recall gift interviewed last week around the tasks involved in the production process.
John: Yes, this is what we found. The old allocation approach indicates that the simple boat expenses $2,880 to build and the Deluxe watercraft costs $3,650 come build. Our typical sales price for the straightforward is $3,200 and also $4,500 for the Deluxe. You can see why we propelled sales the the deluxe boat—it has a benefit of $850 per boat.
Cindy: John, from your analysis, that looks together if us were wrong about the Deluxe watercraft being the many profitable.
John: We do have some startle results. Making use of activity-based costing, strategy I think is much more accurate, the Deluxe watercraft is not lucrative at all. In fact, we lose $530 for each Deluxe watercraft sold, and also the profits from the simple boat space much greater than we assumed at $596 per unit.
Cindy: I see straight materials and also direct labor space the exact same no issue which costing mechanism we use. Why is there such a huge variation in overhead costs?
John: Good question! as soon as we offered our old approach of one plantwide rate based upon direct job hours, the Deluxe process consumed 20 percent the all direct labor hours worked—that is, 50,000 luxurious hours separated by 250,000 full hours. Thus the Deluxe design was allocated 20 percent of every overhead costs. Using activity-based costing, we figured out five crucial activities and assigned overhead costs based on the use of this activities. The Deluxe procedure consumed more than 20 percent that the resources detailed for every activity. For example, running machines is just one of the many costly activities, and the Deluxe design used about 44 percent of the resources detailed by this activity. This is significantly greater than the 20 percent allocated using direct labor hours under the old approach.
Bob: This definitely makes sense! each Deluxe watercraft takes a totality lot more maker hours to create than the straightforward boat.
Cindy: Thanks because that this analysis, John. Currently we know why firm profits have actually been declining even despite sales have actually increased. Either the luxurious sales price must go increase or costs must go down—or a combination of both!

Figure 3.7 Activity-Based Costing matches Plantwide Costing in ~ SailRite Company

*From number 3.2 "SailRite agency Product expenses Using One Plantwide Rate based on Direct job Hours".

**From number 3.5 "Allocation the Overhead expenses to commodities at SailRite Company".


Question: SailRite has much more accurate product expense information using activity-based costing to allocate overhead. Why is the overhead cost per unit so various using activity-based costing?

 

Answer: number 3.8 "Detailed analysis of Overhead Allocations at SailRite Company" provides a more thorough watch at just how the luxurious product consumes a far-reaching share that overhead resources—much higher than the 20 percent that was being allocated based upon direct job hours. Stop look at number 3.8 "Detailed evaluation of Overhead Allocations at SailRite Company" in detail:

The DLH (direct labor hours) tower represents overhead prices allocated using straight labor hours as the allocation base whereby 80 percent to be allocated to the basic boat (= 200,000 hrs ÷ 250,000 total hours) and 20 percent allocated come the Deluxe watercraft (= 50,000 hrs ÷ 250,000 total hours). The Diff. (difference) shaft shows the difference between one allocation technique and the other. Notification the shift in the allocation of overhead costs using activity-based costing. A full of $1,380,000 in overhead costs shifts come the deluxe sailboat, which amounts to $1,380 per boat (= $1,380,000 ÷ 1,000 boats).

Figure 3.8 Detailed evaluation of Overhead Allocations at SailRite Company

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*Amounts in this shaft come from figure 3.5 "Allocation the Overhead costs to assets at SailRite Company".

**Amounts in this tower are calculation by multiply 80 percent for the straightforward boat (20 percent because that the Deluxe) through the total overhead expense for the activity. Because that example, the complete overhead expense for purchasing products is $1,200,000 (see figure 3.4 "Predetermined Overhead rates for SailRite Company") and also $1,200,000 × 80 percent = $960,000. Utilizing the plantwide approach (one plantwide rate based on direct job hours), $960,000 is the quantity allocated to the basic sailboat because that this activity, and also $240,000 is the amount allocated come the luxurious boat.


The main reason that utilizing activity-based costing shifted overhead expenses to the luxurious sailboat is that developing each Deluxe watercraft requires an ext resources than the straightforward boat. For example, the an easy boat requires 50,000 maker hours to develop 5,000 boats, and also the Deluxe boat requires 40,000 machine hours to create 1,000 boats. The number of machine hours required per watercraft produced is as follows:


*

You can see indigenous this evaluation that the Deluxe boat consumes four times the an equipment hours that the an easy boat. At a rate of $30 per maker hour, the Deluxe boat is assigned $1,200 per watercraft for this activity ($30 price × 40 machine hours) when the straightforward boat is assigned $300 per boat ($30 price × 10 an equipment hours).


Advantages and also Disadvantages of ABC

Question: Activity-based costing certainly provides far better cost information than most timeless costing methods, such as plantwide and department allocation methods. However, ABC has its limitations. What space the benefits and defect of making use of activity-based costing?

 

Answer: The advantages and flaw of ABC are as follows:


Advantages

More accurate cost information leads to far better decisions. The price information detailed by alphabet is normally regarded as much more accurate than the information noted by most traditional costing methods. This enables management to make much better decisions in areas such as product pricing, product line transforms (adding commodities or eliminating products), and product mix decisions (how much of each product to produce and also sell).

Increased knowledge of production activities leads to process improvements and also reduced costs. ABC needs identifying the activities involved in the production process (step 1) and assigning expenses to these activities (step 2). This gives management through a much better view the the detailed activities involved (purchasing materials, machine setups, inspections, and so forth) and the price of each activity. Supervisors are much more likely to emphasis on improving effectiveness in the many costly activities, in order to reducing costs.


Disadvantages

ABC systems can be i have lot of money to implement. alphabet systems call for teamwork throughout the organization and also therefore need employees to take time out from your day-to-day tasks to aid in the ABC procedure (e.g., to determine costly activities). Assigning expenses to tasks takes time, together does identifying and tracking cost drivers. And assigning expenses to products requires a far-reaching amount of time in the bookkeeping department. Imagine having actually 15 cost pools (activities), each v a predetermined overhead rate offered to entrust overhead costs to the company’s 80 products—not an unrealistic example for a big company. The bookkeeping costs incurred to maintain such a system have the right to be prohibitively high.

Unitizing fixed prices can be misleading. Product costing requires allocating expenses from task centers come products and also calculating a product expense per unit. The trouble with this method is that fixed expenses are frequently a large part of the overhead prices being allocated (e.g., building and machinery depreciation and supervisor salaries). Recall the fixed prices are expenses that do not readjust in total with alters in activity.

Looking back to the SailRite instance using activity-based costing, the deluxe sailboat cost $5,030 per unit come produce based upon production of 1,000 systems (as displayed in number 3.5 "Allocation the Overhead costs to products at SailRite Company"). If SailRite produce 2,000 devices of the deluxe boat, will certainly the unit price remain at $5,030? probably not. A far-ranging portion the overhead expenses are fixed and will be spread out over more units, thereby reducing the price per unit. We attend to this problem at length in later chapters. The allude here is that managers must beware of using per unit price information blindly for decision making, an especially if a far-reaching change in the level of manufacturing is anticipated.

The benefits might not outweigh the costs. providers with one or two commodities that need very small variation in production might not advantage from an abc system. Mean a agency produces one product. The overhead costs can be divided into together many expense pools as you like, yet all overhead expenses will still be assigned come the one product. (We must mention, however, that monitoring would advantage from knowledge the activities involved in the process and the costs associated with each activity. It’s the allocation come the one product—steps 4 and also 5 of ABC—that would certainly provide tiny useful info in this scenario.)

Companies that produce several different commodities may believe that the benefits of implementing ABC will certainly outweigh the costs. However, management must be ready to use the ABC details to benefit the company. Companies prefer Chrysler team LLC have actually been well-known to try ABC, only to accomplish resistance from your managers. Until supervisors are willing to use the ABC details to make renovations in the organization, there is no suggest in implementing such a system.


Business in action 3.1

Characteristics of companies That usage Activity-Based Costing

A survey of 130 U.S. Production companies yielded some amazing results. The companies that provided activity-based costing (ABC) had higher overhead expenses as a percent of complete product costs than suppliers that used classic costing. Those using ABC additionally had a greater level of automation. The complexity of manufacturing processes and products tended to be higher for those utilizing ABC, and also ABC carriers operated at capacity more frequently.

It is crucial to keep in mind that the differences between companies utilizing ABC and companies using traditional costing systems in every these areas—overhead costs, automation, complexity of production, and frequency that capacity—were relatively small. However, users of ABC shown their systems were much more adequate than timeless systems in providing beneficial information for power evaluation and cost reduction.


Source: Susan B. Hughes and also Kathy A. Paulson Gjerde, “Do Different cost Systems do a Difference?” Management accounting Quarterly, autumn 2003.


ABC cost Flows

Question: How space overhead costs recorded once using activity-based costing?

 

Answer: we presented the circulation of expenses for a project costing system in thing 2 "How Is project Costing used to Track manufacturing Costs?", including how to track actual overhead costs and also how to monitor overhead applied using a separate manufacturing overhead account. The price flows space the same for an activity-based costing system, v one exception. Instead of using one plantwide overhead rate to clues (or apply) overhead come products, one ABC device uses number of overhead prices to allocate overhead. The entry to document this allocation—whether it requires one rate or many rates—is the exact same as the entry in thing 2 "How Is job Costing used to Track production Costs?". Merely debit work-in-process inventory and also credit manufacturing overhead because that the amount of overhead applied. (Some companies use separate work-in-process inventory and also manufacturing overhead accounts for each activity. Because that the benefits of simplicity, we perform not use different accounts.)

For example, assume manufacturing of SailRite’s basic sailboats has actually the following cost driver activity for one week of operations:


*

*From figure 3.4 "Predetermined Overhead rates for SailRite Company".


*

Recall from thing 2 "How Is job Costing supplied to Track manufacturing Costs?" that the production overhead account is closeup of the door to price of items sold in ~ the end of the period. If actual overhead costs are higher than applied overhead, the result underapplied overhead is closed v a debit to price of items sold and also a credit transaction to manufacturing overhead. If actual overhead costs are reduced than used overhead, the resulting overapplied overhead is closed with a debit to production overhead and a credit to cost of products sold.


Recap of three Allocation Methods

We have questioned three various methods of allocating overhead to products—plantwide allocation, room allocation, and activity-based costing. Remember, full overhead prices will not adjust in the short run, however the way total overhead expenses are allocated to products will change depending ~ above the an approach used.

Figure 3.9 "The Three methods of Overhead Allocation" presents the 3 allocation methods, utilizing SailRite as an example. Notification that the 3 pie charts in the illustration room of equal size, representing the $8,000,000 total overhead expenses incurred by SailRite.


Figure 3.9 The Three methods of Overhead Allocation

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Overhead Rates:

1 Allocated based upon direct labor hrs (DLH):$8,000,000 ÷ 250,000 DLH = $32 per DLH.

2 Allocated based upon direct labor hrs (DLH): $5,000,000 ÷ 217,000 DLH = $23 every DLH.

3 Allocated based on device hours (MH): $3,000,000 ÷ 60,000 MH = $50 every MH.

4 Allocated based upon direct labor hrs (DLH): $1,500,000 ÷ 250,000 DLH = $6 per DLH.

5 Allocated based upon inspection hours (IH): $1,000,000 ÷ 20,000 IH = $50 per IH.

6 Allocated based on purchase requisitions (PR): $1,200,000 ÷ 10,000 PR = $120 every PR.

7 Allocated based on an equipment setups (MS): $1,600,000 ÷ 2,000 multiple sclerosis = $800 per MS.

8 Allocated based on device hours (MH): $2,700,000 ÷ 90,000 MH = $30 every MH.


Key Takeaway

Activity-based costing focuses on identifying the tasks required to do products, ~ above forming cost pools because that each activity, and on allocating overhead expenses to the products based upon their usage of every activity. Alphabet systems and also traditional solution often an outcome in vastly various product costs. However even if the result product prices are not much different, ABC provides managers with a far better understanding the the production tasks required because that each task and the connected costs, which often leads to boosted efficiency and also reduced costs.

Business in action 3.2

Using Activity-Based Costing to controversy Predatory Pricing

BuyGasCo Corporation, a privately owned chain the gas station based in Florida, was taken to court because that selling constant grade gasoline listed below cost, and an injunction to be issued. Florida legislation prohibits offering gasoline below refinery expense if doing so injures competition. Utilizing a plantwide approach of allocating prices to products, the plaintiff’s costing skilled was able to support the allegation of predatory pricing. The defendant’s expert witness, an accountancy professor, used activity-based costing to dispute the allegation.

Both costing specialists had to allocate costs to each of the three qualities of gasoline (regular, plus, and also premium) to identify a complete cost every grade that fuel and also a expense per gallon because that each grade. Sales of regular grade fuel were significantly greater (63 percent of complete sales) than the various other two grades. Utilizing the plantwide approach, the plaintiff‘s skilled allocated all costs based on gallons that gas sold. Making use of the activity-based costing approach, the defendant‘s skilled formed three task cost pools—labor, kiosk, and gas dispensing. The an initial two cost pools allocated expenses using gallons the gas sold and also therefore were allocated as they would be with the plantwide approach (63 percent for constant grade, 20 percent because that plus, and 17 percent for premium). The 3rd cost pool (gas dispensing) allocated expenses equally to every grade of fuel (i.e., one-third of prices to every grade that fuel). The gas dispensing pool included costs because that storage tanks, all of which to be the same size, as well as gas pumps and also signs.

Compared through the plantwide approach, activity-based costing showed a lower cost per gallon for continuous gas and also a greater cost every gallon because that the other two grades of fuel. Once the ABC info was presented, the instance was settled, and the early stage injunction to be lifted.


Sources: thomas L. Barton and John B. MacArthur, “Activity-Based Costing and also Predatory Pricing: The case of the Petroleum retail Industry,” Management Accounting, feather 2003; every Business, “Home Page,” http://www.allbusiness.com.


Review trouble 3.3

Parker agency produces an inkjet press that sells because that $150 and also a laser printer that sells because that $350. Last year, complete overhead costs of $1,050,000 to be allocated based upon direct job hours. A total of 15,000 direct labor hours were forced last year to build 12,000 inkjet printers (1.25 hours per unit), and 10,000 direct labor hrs were required to develop 4,000 laser printers (2.50 hours per unit). Total direct labor and also direct materials prices for the year were as follows:


The monitoring of Parker company would like to usage activity-based costing come allocate overhead quite than use one plantwide rate based on direct labor hours. The following estimates are because that the activities and related expense drivers identified as having actually the greatest impact on overhead costs.


*

Required:

calculation the straight materials expense per unit and also direct labor price per unit because that each product.

 

utilizing the plantwide allocation method, calculate the predetermined overhead rate and determine the overhead price per unit because that the inkjet and laser products. What is the price per unit for the inkjet and laser products?

 

making use of the activity-based costing assignment method, calculation the predetermined overhead rate for each activity. (Hint: step 1 through action 3 in the activity-based costing procedure have already been done because that you; this is step 4.) using the activity-based costing assignment method, point out overhead to every product. (Hint: This is step 5 in the activity-based costing process.) recognize the overhead price per unit. Round quantities to the nearest dollar. What is the product price per unit because that the inkjet and also laser products? calculate the every unit profit for each product using the plantwide approach and also the activity-based costing approach. Talk about the differences between the results of the two approaches.

Solutions come Review problem 3.3

The expense per unit for direct materials is as follows:


*

 

The plantwide allocation offered by Parker agency is based on direct job hours. The predetermined overhead price is calculated as follows:

Estimated overhead costEstimated activity in allocation base=$1,050,00025,000 hours=$42 per direct labor hour

Because the inkjet printer requires 1.25 straight labor hrs to build and also the laser printer takes 2.50 straight labor hrs to develop (both numbers are detailed in the difficulty data), $52.50 in overhead is allocated come 1 unit that the inkjet product (= $42 price × 1.25 hours) and $105 in overhead is allocated come 1 unit of the laser product ($42 rate × 2.50 direct labor hours).

Per unit product costs are as follows:


*

 

Direct materials and also direct labor determined from concern 1.

*$52.50 = 1.25 direct labor hrs per unit × $42 rate.

**$105 = 2.50 direct labor hrs per unit × $42 rate.


*

 

*Overhead allocated equals the predetermined overhead rate times the expense driver activity.

**Overhead price per unit because that the inkjet printer equates to $695,000 (overhead allocated) ÷ 12,000 units produced, and for the laser printer, $355,000 ÷ 4,000 devices produced. Quantities are rounded to the nearest dollar.


Although unit product expenses do not readjust significantly because that the inkjet printer when activity-based costing is supplied (from $147.50 to $153), the expense increases enough to an outcome in a $3 loss because that each unit. Vice versa, the laser printer expenses decrease substantially from $285 to $269 per unit when using activity-based costing, leading to a benefit of $81 every unit.

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The shift in overhead costs to the inkjet printer is primarily a result of the inkjet printer utilizing 80 percent the the production run resources and also thus being assigned 80 percent of the overhead costs linked with production runs. The plantwide rate strategy only assigned 60 percent of every overhead expenses to the inkjet printer, including those related to production runs (60 percent = 15,000 inkjet direct labor hours ÷ 25,000 full direct labor hours).