Question

The Alright Manufacturing Company in Rochester, Minnesota, assembles and tests electronic components used in smartphones. Consider the following data regarding component T24 (amounts are per unit):

Direct materials cost \( 80.00

Direct labor cost 20.00

Activity-based costs allocated ?

Total manufacturing product cost ?

The activities required to build the component follow:

Activity Allocation Base Cost Allocated to Each Unit

Start station Number of raw component chassis 4 * \) 1.50 = \( 6.00

Dip insertion Number of dip insertions ? * 0.30 = 9.60

Manual insertion Number of manual insertions 10 * 0.50 = ?

Wave solder Number of components soldered 4 * 1.90 = 7.60

Backload Number of backload insertions 7 * ? = 4.20

Test Number of testing hours 0.43 * 90.00 = ?

Defect analysis Number of defect analysis hours 0.15 * ? = 12.00

Total activity-based costs \) ?

Requirements

2. Why might managers favor this ABC system instead of Alright’s older system, which allocated all manufacturing overhead costs on the basis of direct labor hours?

Short answer

Answer

The activity-based costing is preferred over traditional methods due to reasonable allocation based on different activities associated with different products.

Step-by-step solution

Activity-based costing system

Activity-based costing system is a procedure for allocating costs based on different tasks, operations, or procedures. Under activity-based costing, the overhead costs are segregated between different activities and then the different activities costs are allocated to different products or services.

Why activity-based costing is preferred over traditional costing

Under traditional costing, the overhead costs are allocated based on a single allocation base. That allocation base may or may not be relevant to all products. So, the cost ascertained under the traditional method may be relevant for some products but may not be relevant or fair for other products.

Under activity-based costing, the overheads are allocated based on the activities associated with different products. In this way, all products are charged for the relevant activities performed for that product. So, the cost ascertained for different products under this system is relevant and fair for all products.