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

question 39

Essay

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: 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?

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Definitions:

Present Value

The current valuation of future monetary sums or cash flow streams, using a given return rate for discounting.

Capital Cost Allowance (CCA)

A taxable expense in Canada that a business can claim for the depreciation of tangible property.

Required Rate Of Return

The lowest annual return percentage that persuades individuals or companies to commit capital to a particular project or security.

Net Working Capital

The difference between a company's current assets and current liabilities, indicating its short-term liquidity.