Activity Based Costing as an Alternative to Traditional Product Costing Essay

If manufacturing overhead rates were allocated based on direct labor hours, the total manufacturing overhead cost for each product will seven hundred fifty thousand dollars ($750,000) and two hundred fifty thousand dollars ($250,000) for the mono-relay and bi-relay, respectively. This is computed by multiplying the one million dollars ($1,000,000) total manufacturing overhead with the total direct labor cost for each product over the total direct labor cost for both products. The manufacturing overhead cost per unit of product is eighteen dollars and seventy-five cents ($18. 75) and twenty-five dollars ($25) for the mono-relay and the bi-relay, respectively. This is arrived at by dividing the manufacturing overhead cost allocated to each product with the number of units produced. The total product cost is sixty-two dollars and seventy-two cents ($62. 75) and eighty-five dollars ($85) for the mono-relay and bi-relay, respectively. If the manufacturing overhead rate was allocated based on Activity Based Costing, the manufacturing overhead rate will be allocated to each activity pools as follows: maintaining parts – sixty thousand dollars ($60,000) and one hundred twenty thousand dollars ($120,000) for the mono-relay and bi-relay, respectively; processing – seventy-two thousand dollars ($72,000) and eighteen thousand dollars ($18,000) for the mono-relay and bi-relay, respectively; quality control – one hundred thousand dollars ($100,000) and one hundred thirty thousand dollars ($130,000) for the mono-relay and bi-relay, respectively; and machine-related overhead – two hundred thousand dollars ($200,000) and three hundred thousand dollars ($300,000) for the mono-relay and bi-relay, respectively. This is computed by multiplying the pre-determined overhead cost for each activity with ratio as given in the problem. The total manufacturing cost for each product is four hundred thirty-two thousand dollars ($432,000) and five hundred sixty-eight dollars ($568,000) for the mono-relay and bi-relay, respectively. The figure is arrived at by adding the manufacturing overhead allocated to the each activity pool for each of the product, as computed above. The unit product cost per unit of product, using Activity Based Costing, is ten dollar and eighty cents ($10. 8) and fifty-six dollars and eighty cents. The bi-relay is not more profitable than the mono-relay. Since the company is producing seventy-five percent less bi-relay than mono-relay, the cost of maintaining parts inventory, quality-control and machine-related cost is much higher per unit of bi-relay than mono-relay.