Kettle Company produces two products (F56 and F57), applying manufacturing overhead on the basis of direct labor hours. Anticipated unit production costs (material, labor, and overhead) and manufacturing volumes are: F56: 2,000 units, $234F57: 3,500 units, $271Kettle's overhead arises because of various activities, one of which is purchase-order processing. Budgeted cost for this activity is expected to be $70,000. The firm believes that the number of purchase orders processed is a key cost driver and expects the following activity for its products: F56, 10 purchase orders; F57, 40 purchase orders. Kettle's selling prices are based heavily on cost.Required: A. Activity-based costing (ABC) is said to result in improved costing accuracy when compared with traditional costing procedures.

Question

Briefly explain how this improved accuracy is attained.B. Compute: 1. the pool rate for purchase-order processing.2. the purchase-order processing cost to be charged to one unit of F56.C. Assume that Kenyon switched to activity-based costing and calculated total unit production costs as follows: F56, $285; F57, $220.1. Which of the two products, F56 or F57, was overcosted prior to the change to ABC? No explanation is necessary.2. Which of the two products, F56 or F57, may have been less competitive in the marketplace prior to the change to ABC? Briefly explain.

What will be an ideal response?

Answer 1

A. Activity-based costing (ABC) uses multiple cost drivers, more closely aligning individual costs with the factors that are creating them. Traditional systems, in contrast, use fewer drivers and therefore result in "lumping" unlike activities (unit-level, batch-level, and so forth) together. The end result is that ABC tends to eliminate the cost distortion that sometimes arises with traditional systems, more specifically, the under- or overcosting of products. Additionally, the use of multiple cost drivers allows users to better consider variations in consumption ratios that may exist among product lines.
B. 1. $70,000 ÷ (10 + 40) = $1,400 per order
2. $1,400 × 10 = $14,000; $14,000 ÷ 2,000 units = $7
C. 1. F57 (traditional, $271 vs. ABC, $220)
2. F57. Kettle's selling prices are based heavily on cost. An overcosted product will result in a higher selling price, which may make the company less competitive.