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

question 123

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: $\begin{array}{lrr}&\text { Job A }&\text { Job B}\\\text { Direct materials costs } & \$ 10,000 & \$ 50,000 \\\text { Direct labor costs } & \$ 1,000 & \$ 10,000 \\\text { Number of direct labor hours } & 40 & 400 \\\text { Number of parts } & 500 & 2,000 \\\text { Number of turns } & 25,000 & 50,000 \\\text { Number of machine hours } & 140 & 1,000 \\\text { Number of units in each job (all tested) } & 15 & 200\end{array}$ 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?

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Definitions:

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Runoff

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Increasing Numbers

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