Decision Case 18-1 Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company’s original job costing system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of $22 per direct labor hour. A task force headed by Harris’s CFO recently designed an ABC system with four activities. The ABC system retains the current system’s two direct cost categories. Overhead costs are reflected in the four activities. Pertinent data follow:
|
Activity |
Number of parts |
Cost Allocation Rate |
|
Materials handling |
Number of setups |
$ 0.85 |
|
Machine setup |
Assembling hours |
500.00 |
|
Assembling |
Number of shipments |
80.00 |
|
Shipping |
Allocation Base |
1,500.00 |
Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B. Budget data relating to the contracts follow:
|
Job A |
Job B |
|
|
Number of parts |
15,000 |
2,000 |
|
Number of setups |
6 |
4 |
|
Number of assembling hours |
1,500 |
200 |
|
Number of shipments |
1 |
1 |
|
Total direct labor hours |
8,000 |
600 |
|
Number of units produced |
100 |
10 |
|
Direct materials cost |
$220,000 |
$30,000 |
|
Direct labor cost |
$160,000 |
$12,000 |
Requirements
1. Compute the product cost per unit for each job, using the original costing system (with two direct cost categories and a single overhead allocation rate).
2. Suppose Harris Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them? Explain.
