Castenet Company uses a volume-based costing system that applies overhead cost based on direct labor hours at $250 per direct labor hour.
The company is considering adopting an activity-based costing system with the following data: The two jobs processed in the month of June had the following characteristics: $\begin{array}{lrr}&\text { Job A }&\text { Job B}\
\text { Direct materials costs } & \$ 10,000 & \$ 50,000 \
\text { Direct labor costs } & \$ 1,000 & \$ 10,000 \
\text { Number of direct labor hours } & 40 & 400 \
\text { Number of parts } & 500 & 2,000 \
\text { Number of turns } & 25,000 & 50,000 \
\text { Number of machine hours } & 140 & 1,000 \
\text { Number of units in each job (all tested) } & 15 & 200
\end{array}$ Required:
1.Compute the unit manufacturing cost of each job under the firm's current volume-based costing system.
2.Compute the unit manufacturing cost of each job under the activity-based costing system.
3.Compare the unit manufacturing cost for Jobs A and B computed in requirements 1 and 2.
(a) Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?

Question

Castenet Company uses a volume-based costing system that applies overhead cost based on direct labor hours at $250 per direct labor hour.
The company is considering adopting an activity-based costing system with the following data:  The two jobs processed in the month of June had the following characteristics: $\begin{array}{lrr}&\text { Job A }&\text { Job B}\
\text { Direct materials costs } & \$ 10,000 & \$ 50,000 \
\text { Direct labor costs } & \$ 1,000 & \$ 10,000 \
\text { Number of direct labor hours } & 40 & 400 \
\text { Number of parts } & 500 & 2,000 \
\text { Number of turns } & 25,000 & 50,000 \
\text { Number of machine hours } & 140 & 1,000 \
\text { Number of units in each job (all tested) } & 15 & 200
\end{array}$ Required:
1.Compute the unit manufacturing cost of each job under the firm's current volume-based costing system.
2.Compute the unit manufacturing cost of each job under the activity-based costing system.
3.Compare the unit manufacturing cost for Jobs A and B computed in requirements 1 and 2.
(a) Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?

Quizplus · Accepted Answer

The Answer of Castenet Company uses a volume-based costing system that applies overhead cost based on direct labor hours at $250 per direct labor hour.
The company is considering adopting an activity-based costing system with the following data:  The two jobs processed in the month of June had the following characteristics: $\begin{array}{lrr}&\text { Job A }&\text { Job B}\
\text { Direct materials costs } & \$ 10,000 & \$ 50,000 \
\text { Direct labor costs } & \$ 1,000 & \$ 10,000 \
\text { Number of direct labor hours } & 40 & 400 \
\text { Number of parts } & 500 & 2,000 \
\text { Number of turns } & 25,000 & 50,000 \
\text { Number of machine hours } & 140 & 1,000 \
\text { Number of units in each job (all tested) } & 15 & 200
\end{array}$ Required:
1.Compute the unit manufacturing cost of each job under the firm's current volume-based costing system.
2.Compute the unit manufacturing cost of each job under the activity-based costing system.
3.Compare the unit manufacturing cost for Jobs A and B computed in requirements 1 and 2.
(a) Why do the two cost systems differ in their total cost for each job?
(b) Why might these differences be important to the Company?

Castenet Company Uses a Volume-Based Costing System That Applies Overhead