Greetings,
I just started my accounting class and I do not have any accounting experience of knowledge (my first acct class). Could you please help me out. I just need the traditional and ABC direct, indirect, and unallocated cost answer for the two accounting systems.
You have been selected to complete the following table by indicating for each activity whether the related cost is direct, indirect, or unallocated. For each indirect cost, indicate one appropriate cost-allocation base (more than one cost allocation base may be appropriate).
Setting up for a production run--related cost is mechanic wages:
Traditional answer: ABC answer:
Purchasing materials and parts to be used in products--related cost is materials and parts cost:
Traditional answer: ABC answer:
Shipping sold products to customers (distributors)--related cost is fuel on company's fleet of trucks:
Traditional answer: ABC answer:
Market research study conducted by marketing staff to assess demand for potential new product--related cost is salaries of market research staff:
Traditional answer: ABC answer:
Production scheduling--related cost is salaries of production scheduling managers:
Traditional answer: ABC answer:
Purchasing materials and parts to be used in products--related cost is salaries of purchasing agents:
Traditional answer: ABC answer:
Order processing of customer orders--related cost is salaries of order staff:
Traditional answer: ABC answer:
Preparing cost analyses--related cost is cost acct salary:
Traditional answer: ABC answer:
Designing a new product--related cost is salaries of design engineers that are fully dedicated to the new product:
Traditional answer: ABC answer:
Managing overall operations--related cost is salary of executive of company:
Traditional answer: ABC answer:
A fast-food establishment is thinking of buying a new cooking grill and refrigeration unit. The costs of these new machines are $12,500 and $9,000, respectively. The installation costs of the new equipment will run about $800. It is estimated that 10% more customers can be served with the new equipment, which would mean an additional annual net cash flow of approximately $4,500. The salvage value of the old grill and refrigeration unit is estimated to be $1,000.
The firm's cost of capital is 12%. The equipment should last 10 years, at a minimum.
Sure! Let's go through each activity and identify whether the related cost is direct, indirect, or unallocated for both the traditional and activity-based costing (ABC) systems.
1. Setting up for a production run - mechanic wages:
- Traditional answer: Indirect cost (since it supports production but cannot be easily traced to a specific product). In traditional costing, it would likely be allocated based on machine hours, labor hours, or some other allocation base.
- ABC answer: Indirect cost (since it supports production but cannot be easily traced to a specific product). In ABC, it might be allocated based on the number of production setups or machine changeovers.
2. Purchasing materials and parts to be used in products - materials and parts cost:
- Traditional answer: Direct cost (since it can be easily traced to a specific product).
- ABC answer: Direct cost (since it can be easily traced to a specific product).
3. Shipping sold products to customers (distributors) - fuel on the company's fleet of trucks:
- Traditional answer: Indirect cost (since it supports shipping but cannot be easily traced to a specific product). It could be allocated based on the number of shipments or distance traveled.
- ABC answer: Indirect cost (since it supports shipping but cannot be easily traced to a specific product). It might be allocated based on the number of deliveries or weight shipped.
4. Market research study conducted by marketing staff to assess demand for a potential new product - salaries of market research staff:
- Traditional answer: Indirect cost (since it supports market research but cannot be easily traced to a specific product). It could be allocated based on sales revenue or number of market research projects.
- ABC answer: Indirect cost (since it supports market research but cannot be easily traced to a specific product). It might be allocated based on the number of research studies conducted or the time spent on each study.
5. Production scheduling - salaries of production scheduling managers:
- Traditional answer: Indirect cost (since it supports production scheduling but cannot be easily traced to a specific product). It could be allocated based on machine hours or labor hours.
- ABC answer: Indirect cost (since it supports production scheduling but cannot be easily traced to a specific product). It might be allocated based on the number of production orders or setups.
6. Purchasing materials and parts to be used in products - salaries of purchasing agents:
- Traditional answer: Indirect cost (since it supports purchasing but cannot be easily traced to a specific product). It could be allocated based on purchase orders or the number of suppliers.
- ABC answer: Indirect cost (since it supports purchasing but cannot be easily traced to a specific product). It might be allocated based on the number of purchase orders processed or the cost of materials purchased.
7. Order processing of customer orders - salaries of order staff:
- Traditional answer: Indirect cost (since it supports order processing but cannot be easily traced to a specific product). It could be allocated based on the number of customer orders or order lines.
- ABC answer: Indirect cost (since it supports order processing but cannot be easily traced to a specific product). It might be allocated based on the number of customer orders processed or the time spent on each order.
8. Preparing cost analyses - cost accountant's salary:
- Traditional answer: Unallocated cost (since it does not support a specific activity or product). It might be treated as an overhead expense and allocated using a predetermined overhead rate.
- ABC answer: Unallocated cost (since it does not support a specific activity or product). It might be treated as an overhead expense but not allocated to any specific cost pool.
9. Designing a new product - salaries of design engineers that are fully dedicated to the new product:
- Traditional answer: Direct cost (since it can be easily traced to the specific new product).
- ABC answer: Direct cost (since it can be easily traced to the specific new product).
10. Managing overall operations - salary of executive of the company:
- Traditional answer: Unallocated cost (since it does not support a specific activity or product). It might be treated as an overhead expense and allocated using a predetermined overhead rate.
- ABC answer: Unallocated cost (since it does not support a specific activity or product). It might be treated as an overhead expense but not allocated to any specific cost pool.
In summary, the traditional accounting system tends to allocate indirect costs using predetermined overhead rates, while the ABC system attempts to allocate costs more accurately based on the activities that drive those costs.