Learning Objective

Understand exactly how to usage the 5 steps that activity-based costing to identify product costs.

Question: expect the supervisors at SailRite firm decide that the benefits of implementing an activity-based costing system would exceed the cost, and thus the firm should use activity-based costing to allocate overhead. What room the five steps of activity-based costing, and also how would this method work because that SailRite?

 

Answer: Activity-based costing (ABC)A an approach of costing that supplies several cost pools, and therefore number of predetermined overhead rates, organized by activity to allocate overhead costs. Offers several price pools, arranged by activity, to allocate overhead costs. (Remember the plantwide allocation supplies one cost pool because that the entirety plant, and department allocation provides one expense pool for each department.) The idea is that tasks are forced to develop products—activities such together purchasing materials, setting up machinery, assembling products, and inspecting finished products. These tasks can it is in costly. Therefore the expense of activities should be allocated to products based upon the products’ usage of the activities.

You are watching: ________ is considered while choosing a cost allocation base for activity costs in abc costing.


ABC in action at SailRite Company

Five measures are forced to implement activity-based costing. Together you work-related through the example for SailRite Company, once again keep in mind that full estimated overhead costs remain in ~ $8,000,000. However, the full is damaged out into different activities quite than departments, and also an overhead rate is established for each activity. The five steps room as follows:

 

Step 1. Recognize costly tasks required to complete products.

An activityAny process or procedure the consumes overhead resources. Is any process or procedure the consumes overhead resources. The goal is to recognize all the tasks required to make the this firm products. This calls for interviewing and also meeting with personnel throughout the organization. Companies that usage activity-based costing, such as Hewlett Packard and IBM, may identify hundreds of tasks required to do their products. The most challenging part the this step is narrowing down the tasks to those that have the biggest influence on overhead costs.

After meeting with personnel transparent the company, SailRite’s accountant identified the following activities as having actually the biggest influence on overhead costs:

purchasing materials setup up makers Running machines Assembling assets Inspecting finished assets

 

Step 2. Entrust overhead expenses to the tasks identified in action 1.

This step requires that overhead costs linked with each task be assigned to the activity (i.e., a price pool is formed for each activity). For SailRite, the cost pool for the purchasing materials task will include expenses for items such as earnings of purchasing personnel, rent for purchasing room office space, and depreciation of purchasing office equipment.

The accountant in ~ SailRite arisen the complying with allocations after mindful review of all overhead prices (remember, these room overhead costs, not direct materials or direct labor costs):


*

*We must note the this is no the direct labor cost. Instead, this represents overhead costs linked with assembling products, such as supplies and also the factory room being offered for assembly.


At this point, us have figured out the many important and also costly tasks required to make products, and also we have actually assigned overhead expenses to each of this activities. The next step is to uncover an assignment base the drives the cost of every activity.

 

Step 3. Recognize the price driver because that each activity.

A expense driverThe activity that causes the costs connected with one activity. Is the activity that causes (or “drives”) the costs linked with the activity. Identifying price drivers needs gathering information and interviewing vital personnel in various locations of the organization, such as purchasing, production, high quality control, and also accounting. After mindful scrutiny of the procedure required for each activity, SailRite established the following cost drivers:


Activity Cost Driver Estimated annual Cost Driver Activity
Purchasing materials Purchase requisitions 10,000 requisitions
Setting increase machines Machine setups 2,000 setups
Running machines Machine hours 90,000 hours
Assembling products Direct labor hours 250,000 hours
Inspecting perfect products Inspection hours 20,000 hours

Notice the this information contains an calculation of the level of activity for each expense driver, i m sorry is necessary to calculation a predetermined price for each activity in step 4.

 

Step 4. Calculation a predetermined overhead rate for every activity.

This is excellent by dividing the estimated overhead expenses (from step 2) by the approximated level of cost driver task (from action 3). Figure 3.4 "Predetermined Overhead rates for SailRite Company" gives the overhead price calculations because that SailRite agency based top top the information displayed in the previous three steps. It shows that products will be charged $120 in overhead costs for each purchase requisition processed, $800 because that each maker setup, $30 for each an equipment hour used, $6 for each direct labor hour worked, and also $50 for each hour of investigate time.


Figure 3.4 Predetermined Overhead prices for SailRite Company

*

 

Step 5. Clues overhead costs to products.

Overhead costs are allocated to commodities by multiplying the predetermined overhead rate for each activity (calculated in step 4) by the level of price driver activity used by the product. The term applied overhead is frequently used to explain this process.

Assume the following yearly cost driver activity takes place at SailRite because that the an easy and deluxe sailboats:Notice that the total task levels presented here enhance the estimated activity levels gift in action 4. This to be done to stop complicating the instance with overapplied and underapplied overhead. However, a much more realistic script would administer actual activity levels that are different than estimated activity levels, thereby producing overapplied and underapplied overhead because that each activity. We described the disposition the overapplied and underapplied overhead in chapter 2 "How Is project Costing offered to Track production Costs?".


Activity Basic Sailboat Deluxe Sailboat Total
Purchasing materials 7,000 requisitions 3,000 requisitions 10,000 requisitions
Setting up machines 1,100 setups 900 setups 2,000 setups
Running machines 50,000 hours 40,000 hours 90,000 an equipment hours
Assembling products 200,000 hours 50,000 hours 250,000 direct labor hours
Inspecting finished products 12,000 hours 8,000 hours 20,000 investigate hours

Figure 3.5 "Allocation that Overhead costs to commodities at SailRite Company" reflects the allocation of overhead utilizing the price driver task just presented and the overhead rates calculated in figure 3.4 "Predetermined Overhead prices for SailRite Company". Notice that allocated overhead costs complete $8,000,000. This is the same price figure supplied for the plantwide and also department allocation methods we questioned earlier. Activity-based costing simply provides a an ext refined way to allocate the exact same overhead prices to products.


Figure 3.5 Allocation of Overhead prices to assets at SailRite Company

*

*Overhead allocated equals the predetermined overhead rate times the price driver activity.

**Overhead cost per unit because that the simple model amounts to $5,020,000 (overhead allocated) ÷ 5,000 devices produced, and also for the luxurious model, it equates to $2,980,000 ÷ 1,000 devices produced.


The bottom of number 3.5 "Allocation of Overhead expenses to commodities at SailRite Company" shows the overhead expense per unit for each product presume SailRite produce 5,000 devices of the straightforward sailboat and also 1,000 systems of the luxurious sailboat. This information is needed to calculate the product cost for each unit that product, i beg your pardon we talk about next.


Product expenses Using the Activity-Based Costing technique at SailRite

Question: As displayed in number 3.5 "Allocation of Overhead expenses to commodities at SailRite Company", SailRite to know the overhead cost per unit making use of activity-based costing is $1,004 for the an easy model and $2,980 because that the Deluxe. Now the SailRite has actually the overhead expense per unit, just how will the agency find the full product cost per unit and resulting profit?

 

Answer: Recall indigenous our conversation earlier that the calculation of a product’s cost involves 3 components—direct materials, straight labor, and also manufacturing overhead. Assume straight materials price $1,000 because that the simple sailboat and also $1,300 because that the Deluxe. Direct labor expenses are $600 because that the simple sailboat and also $750 for the Deluxe. This information, linked with the overhead cost per unit calculated in ~ the bottom of figure 3.5 "Allocation of Overhead prices to products at SailRite Company", provides us what we need to determine the product price per unit because that each model, i m sorry is gift in number 3.6 "SailRite company Product expenses Using Activity-Based Costing". The typical sales price is $3,200 because that the an easy model and also $4,500 because that the Deluxe. Using the product expense information in number 3.6 "SailRite agency Product expenses Using Activity-Based Costing", the an easy model returns a benefit of $596 (= $3,200 price – $2,604 cost) per unit and the Deluxe model yields a loss the $530 (= $4,500 price – $5,030 cost) per unit.


Figure 3.6 SailRite firm Product prices Using Activity-Based Costing

*

As you have the right to see in number 3.6 "SailRite agency Product prices Using Activity-Based Costing", overhead is a far-reaching component of full product costs. This describes the require for a sleek overhead allocation system such as activity-based costing.


Comparison of abc to Plantwide Costing in ~ SailRite

After going through the process of allocating overhead using activity-based costing, man Lester (the agency accountant) dubbed a meeting v the exact same management team introduced in ~ the start of the chapter: Cindy hall (CEO), mary McCann (vice chairman of marketing), and also Bob Schuler (vice chairman of production). Together you review the adhering to dialogue, refer to figure 3.7 "Activity-Based Costing matches Plantwide Costing at SailRite Company", i beg your pardon summarizes John’s findings.


Cindy: What perform you have actually for us, John?
John: I think you’ll find the outcomes of our many recent costing analysis really interesting. Us used technique called activity-based costing to allocate overhead to products.
Bob: I recall being interviewed last week about the tasks involved in the production process.
John: Yes, this is what us found. The old allocation method indicates that the basic boat expenses $2,880 come build and the Deluxe boat costs $3,650 come build. Our average sales price for the simple is $3,200 and also $4,500 for the Deluxe. You have the right to see why we moved sales that the deluxe boat—it has actually a profit of $850 every boat.
Cindy: John, from your analysis, the looks as if us were wrong around the Deluxe watercraft being the most profitable.
John: We do have actually some startle results. Utilizing activity-based costing, technique I think is much an ext accurate, the Deluxe boat is not lucrative at all. In fact, we lose $530 because that each Deluxe boat sold, and also the profits from the straightforward boat space much greater than we thought at $596 per unit.
Cindy: I see straight materials and direct labor are the exact same no matter which costing device we use. Why is there together a large variation in overhead costs?
John: Good question! when we used our old technique of one plantwide rate based on direct labor hours, the Deluxe procedure consumed 20 percent of all direct labor hrs worked—that is, 50,000 luxurious hours divided by 250,000 complete hours. Therefore the Deluxe model was allocated 20 percent of every overhead costs. Using activity-based costing, we established five vital activities and also assigned overhead costs based on the usage of this activities. The Deluxe procedure consumed more than 20 percent that the resources listed for every activity. For example, running machines is among the many costly activities, and the Deluxe design used around 44 percent the the resources noted by this activity. This is significantly greater than the 20 percent allocated using straight labor hours under the old approach.
Bob: This absolutely makes sense! every Deluxe boat takes a totality lot more device hours to produce than the straightforward boat.
Cindy: Thanks because that this analysis, John. Currently we recognize why company profits have been decreasing even despite sales have increased. Either the deluxe sales price have to go up or prices must walk down—or a mix of both!

Figure 3.7 Activity-Based Costing versus Plantwide Costing in ~ SailRite Company

*From figure 3.2 "SailRite agency Product costs Using One Plantwide Rate based on Direct labor Hours".

**From number 3.5 "Allocation the Overhead costs to assets at SailRite Company".


Question: SailRite has an ext accurate product cost information using activity-based costing to allocate overhead. Why is the overhead cost per unit so different using activity-based costing?

 

Answer: figure 3.8 "Detailed evaluation of Overhead Allocations in ~ SailRite Company" offers a much more thorough look at how the luxurious product spend a far-ranging share the overhead resources—much higher than the 20 percent that was being allocated based on direct labor hours. Let’s look at number 3.8 "Detailed analysis of Overhead Allocations at SailRite Company" in detail:

The DLH (direct job hours) pillar represents overhead prices allocated using straight labor hours as the allocation base where 80 percent was allocated come the an easy boat (= 200,000 hours ÷ 250,000 complete hours) and also 20 percent allocated to the Deluxe watercraft (= 50,000 hours ÷ 250,000 full hours). The Diff. (difference) obelisk shows the difference in between one allocation technique and the other. An alert the transition in the allocation the overhead expenses using activity-based costing. A complete of $1,380,000 in overhead expenses shifts to the luxurious sailboat, which quantities to $1,380 per boat (= $1,380,000 ÷ 1,000 boats).

Figure 3.8 Detailed analysis of Overhead Allocations in ~ SailRite Company

*

*Amounts in this shaft come from figure 3.5 "Allocation the Overhead expenses to assets at SailRite Company".

**Amounts in this tower are calculate by multiply 80 percent for the an easy boat (20 percent because that the Deluxe) by the full overhead expense for the activity. Because that example, the full overhead cost for purchasing materials is $1,200,000 (see figure 3.4 "Predetermined Overhead rates for SailRite Company") and also $1,200,000 × 80 percent = $960,000. Utilizing the plantwide approach (one plantwide rate based upon direct job hours), $960,000 is the lot allocated to the straightforward sailboat for this activity, and also $240,000 is the quantity allocated come the deluxe boat.


The major reason that making use of activity-based costing change overhead prices to the deluxe sailboat is that producing each Deluxe watercraft requires much more resources than the an easy boat. For example, the basic boat requires 50,000 maker hours to create 5,000 boats, and the Deluxe boat requires 40,000 maker hours to develop 1,000 boats. The number of an equipment hours forced per boat produced is together follows:


*

You deserve to see native this analysis that the Deluxe watercraft consumes 4 times the maker hours of the straightforward boat. At a price of $30 per an equipment hour, the Deluxe boat is assigned $1,200 per boat for this activity ($30 price × 40 device hours) if the basic boat is assigned $300 per boat ($30 price × 10 maker hours).


Advantages and also Disadvantages the ABC

Question: Activity-based costing undoubtedly provides far better cost information than most traditional costing methods, such as plantwide and also department assignment methods. However, ABC has its limitations. What space the benefits and defect of utilizing activity-based costing?

 

Answer: The advantages and disadvantages of ABC are as follows:


Advantages

More accurate price information leader to far better decisions. The expense information provided by alphabet is typically regarded as an ext accurate than the information provided by most classic costing methods. This enables management come make much better decisions in locations such as product pricing, product line transforms (adding assets or eliminating products), and also product mix decisions (how much of each product to produce and sell).

Increased understanding of production tasks leads to procedure improvements and reduced costs. ABC calls for identifying the activities involved in the production process (step 1) and assigning costs to these activities (step 2). This provides management through a much better view the the detailed activities involved (purchasing materials, machine setups, inspections, and so forth) and also the cost of each activity. Supervisors are much more likely to emphasis on improving performance in the most costly activities, in order to reducing costs.


Disadvantages

ABC systems deserve to be costly to implement. alphabet systems call for teamwork across the organization and also therefore call for employees to take it time the end from your day-to-day activities to aid in the ABC procedure (e.g., to determine costly activities). Assigning expenses to activities takes time, as does identifying and also tracking expense drivers. And also assigning expenses to assets requires a significant amount the time in the bookkeeping department. Imagine having 15 price pools (activities), each v a predetermined overhead rate provided to entrust overhead expenses to the company’s 80 products—not one unrealistic instance for a big company. The accounting costs incurred to maintain such a system deserve to be prohibitively high.

Unitizing fixed costs can it is in misleading. Product costing involves allocating costs from task centers come products and calculating a product expense per unit. The difficulty with this approach is that fixed costs are regularly a big part of the overhead costs being allocated (e.g., building and machinery depreciation and also supervisor salaries). Recall the fixed prices are costs that do not adjust in total with changes in activity.

Looking ago to the SailRite instance using activity-based costing, the luxurious sailboat expense $5,030 every unit come produce based on production the 1,000 devices (as shown in number 3.5 "Allocation that Overhead costs to products at SailRite Company"). If SailRite produce 2,000 units of the deluxe boat, will certainly the unit price remain in ~ $5,030? most likely not. A far-ranging portion of overhead expenses are fixed and will be spread out out over much more units, thereby reducing the expense per unit. We address this concern at size in later chapters. The point here is that supervisors must beware of utilizing per unit cost information blindly for decision making, particularly if a far-reaching change in the level of production is anticipated.

The benefits may not outweigh the costs. service providers with one or two products that need very tiny variation in production may not advantage from an alphabet system. Intend a company produces one product. The overhead prices can be split into together many expense pools as you like, yet all overhead prices will still be assigned come the one product. (We must mention, however, that administration would benefit from understanding the tasks involved in the procedure and the costs connected with each activity. That the allocation come the one product—steps 4 and 5 that ABC—that would provide little useful info in this scenario.)

Companies that develop several different commodities may think that the benefits of implementing ABC will certainly outweigh the costs. However, monitoring must be willing to usage the ABC information to advantage the company. Companies like Chrysler group LLC have been well-known to shot ABC, just to fulfill resistance from your managers. Until managers are willing to usage the ABC info to make renovations in the organization, over there is no suggest in implementing together a system.


Business in activity 3.1

Characteristics of carriers That usage Activity-Based Costing

A inspection of 130 U.S. Manufacturing companies succumbed some exciting results. The carriers that offered activity-based costing (ABC) had greater overhead prices as a percent of complete product expenses than providers that used timeless costing. Those using ABC additionally had a higher level the automation. The intricacy of manufacturing processes and products tended to be higher for those using ABC, and ABC providers operated at capacity much more frequently.

It is necessary to keep in mind that the differences between companies using ABC and companies using timeless costing equipment in all these areas—overhead costs, automation, intricacy of production, and frequency of capacity—were fairly small. However, customers of ABC indicated their equipment were an ext adequate than classic systems in providing helpful information for performance evaluation and also cost reduction.


Source: Susan B. Hughes and also Kathy A. Paulson Gjerde, “Do Different price Systems do a Difference?” Management accountancy Quarterly, loss 2003.


ABC expense Flows

Question: How room overhead costs recorded as soon as using activity-based costing?

 

Answer: we presented the flow of costs for a task costing system in thing 2 "How Is project Costing supplied to Track production Costs?", including exactly how to monitor actual overhead costs and also how to track overhead applied using a separate manufacturing overhead account. The expense flows are the very same for an activity-based costing system, through one exception. Instead of making use of one plantwide overhead price to clues (or apply) overhead come products, one ABC system uses several overhead rates to clues overhead. The entry to document this allocation—whether it involves one rate or many rates—is the exact same as the entry in chapter 2 "How Is job Costing offered to Track production Costs?". Just debit work-in-process inventory and also credit production overhead because that the lot of overhead applied. (Some suppliers use different work-in-process inventory and also manufacturing overhead accounts for each activity. Because that the benefits of simplicity, we carry out not use different accounts.)

For example, assume manufacturing of SailRite’s an easy sailboats has the following price driver task for one mainly of operations:


*

*From figure 3.4 "Predetermined Overhead rates for SailRite Company".


*

Recall from chapter 2 "How Is project Costing supplied to Track production Costs?" that the manufacturing overhead account is closed to expense of products sold in ~ the finish of the period. If actual overhead expenses are higher than applied overhead, the resulting underapplied overhead is closed with a debit to cost of goods sold and a credit transaction to production overhead. If actual overhead costs are reduced than used overhead, the resulting overapplied overhead is closed with a debit to manufacturing overhead and a credit to cost of products sold.


Recap of 3 Allocation Methods

We have discussed three different methods of allocating overhead come products—plantwide allocation, room allocation, and activity-based costing. Remember, full overhead prices will not adjust in the brief run, but the way total overhead costs are allocated to products will change depending ~ above the technique used.

Figure 3.9 "The Three techniques of Overhead Allocation" gift the 3 allocation methods, using SailRite together an example. Notice that the three pie charts in the illustration space of same size, representing the $8,000,000 total overhead costs incurred by SailRite.


Figure 3.9 The Three approaches of Overhead Allocation

*

Overhead Rates:

1 Allocated based on direct labor hours (DLH):$8,000,000 ÷ 250,000 DLH = $32 every DLH.

2 Allocated based on direct labor hrs (DLH): $5,000,000 ÷ 217,000 DLH = $23 every DLH.

3 Allocated based on device hours (MH): $3,000,000 ÷ 60,000 MH = $50 every MH.

4 Allocated based on direct labor hrs (DLH): $1,500,000 ÷ 250,000 DLH = $6 every DLH.

5 Allocated based upon inspection hours (IH): $1,000,000 ÷ 20,000 IH = $50 every IH.

6 Allocated based on purchase requisitions (PR): $1,200,000 ÷ 10,000 PR = $120 per PR.

7 Allocated based on maker setups (MS): $1,600,000 ÷ 2,000 ms = $800 every MS.

8 Allocated based on an equipment hours (MH): $2,700,000 ÷ 90,000 MH = $30 every MH.


Key Takeaway

Activity-based costing focuses on identifying the activities required to do products, top top forming cost pools for each activity, and on allocation overhead costs to the products based on their use of every activity. Abc systems and also traditional equipment often an outcome in vastly various product costs. Yet even if the resulting product prices are not lot different, ABC offers managers with a better understanding that the production tasks required for each task and the associated costs, which frequently leads to improved efficiency and also reduced costs.

Business in action 3.2

Using Activity-Based Costing to controversy Predatory Pricing

BuyGasCo Corporation, a privately owned chain of gas station based in Florida, was required to court because that selling continual grade gasoline listed below cost, and also an injunction to be issued. Florida legislation prohibits marketing gasoline listed below refinery price if doing therefore injures competition. Making use of a plantwide strategy of allocating prices to products, the plaintiff’s costing skilled was able to support the allegation the predatory pricing. The defendant’s experienced witness, an accountancy professor, provided activity-based costing to conflict the allegation.

Both costing professionals had to allocate costs to each of the three qualities of petrol (regular, plus, and premium) to recognize a complete cost every grade of fuel and also a expense per gallon because that each grade. Sales of continual grade fuel to be significantly greater (63 percent of total sales) 보다 the other two grades. Using the plantwide approach, the plaintiff‘s experienced allocated all costs based upon gallons that gas sold. Using the activity-based costing approach, the defendant‘s professional formed three activity cost pools—labor, kiosk, and also gas dispensing. The an initial two price pools allocated costs using gallons the gas sold and also therefore to be allocated together they would certainly be through the plantwide technique (63 percent for regular grade, 20 percent because that plus, and 17 percent for premium). The 3rd cost swimming pool (gas dispensing) allocated prices equally to every grade of fuel (i.e., one-third of expenses to every grade of fuel). The gas dispensing pool contained costs for storage tanks, every one of which to be the exact same size, as well as gas pumps and signs.

Compared through the plantwide approach, activity-based costing verified a lower cost per gallon for continuous gas and a higher cost every gallon because that the various other two qualities of fuel. When the ABC information was presented, the instance was settled, and also the early injunction to be lifted.


Sources: cutting board L. Barton and John B. MacArthur, “Activity-Based Costing and Predatory Pricing: The instance of the Petroleum retail Industry,” Management Accounting, spring 2003; every Business, “Home Page,” http://www.allbusiness.com.


Review problem 3.3

Parker company produces one inkjet press that sells because that $150 and a laser press that sells for $350. Last year, total overhead prices of $1,050,000 to be allocated based upon direct labor hours. A full of 15,000 straight labor hours were forced last year to develop 12,000 inkjet printers (1.25 hrs per unit), and 10,000 direct labor hours were compelled to build 4,000 laser printers (2.50 hrs per unit). Total direct labor and direct materials expenses for the year were as follows:


The management of Parker firm would favor to use activity-based costing come allocate overhead rather than usage one plantwide rate based upon direct job hours. The following estimates are because that the tasks and related cost drivers established as having actually the greatest affect on overhead costs.


*

Required:

calculate the direct materials cost per unit and direct labor cost per unit because that each product.

 

using the plantwide allocation method, calculation the predetermined overhead rate and also determine the overhead cost per unit because that the inkjet and laser products. What is the price per unit for the inkjet and also laser products?

 

using the activity-based costing assignment method, calculate the predetermined overhead rate for every activity. (Hint: action 1 through action 3 in the activity-based costing process have currently been done because that you; this is action 4.) utilizing the activity-based costing allocation method, point out overhead to each product. (Hint: This is action 5 in the activity-based costing process.) identify the overhead price per unit. Round quantities to the nearest dollar. What is the product expense per unit for the inkjet and laser products? calculate the every unit benefit for every product using the plantwide approach and the activity-based costing approach. Talk about the differences in between the outcomes of the 2 approaches.

Solutions come Review difficulty 3.3

The expense per unit for direct materials is as follows:


*

 

The plantwide allocation used by Parker company is based upon direct labor hours. The predetermined overhead price is calculated as follows:

Estimated overhead costEstimated activity in allocation base=$1,050,00025,000 hours=$42 per direct labor hour

Because the inkjet printer calls for 1.25 direct labor hours to build and the laser press takes 2.50 straight labor hours to build (both numbers are detailed in the problem data), $52.50 in overhead is allocated to 1 unit that the inkjet product (= $42 price × 1.25 hours) and also $105 in overhead is allocated come 1 unit of the laser product ($42 price × 2.50 straight labor hours).

Per unit product prices are together follows:


*

 

Direct materials and direct labor figured out from inquiry 1.

*$52.50 = 1.25 straight labor hrs per unit × $42 rate.

**$105 = 2.50 direct labor hrs per unit × $42 rate.


*

 

*Overhead allocated equates to the predetermined overhead price times the cost driver activity.

**Overhead expense per unit because that the inkjet printer equals $695,000 (overhead allocated) ÷ 12,000 devices produced, and also for the laser printer, $355,000 ÷ 4,000 units produced. Amounts are rounded come the nearest dollar.


Although unit product prices do not readjust significantly because that the inkjet printer once activity-based costing is offered (from $147.50 to $153), the price increases sufficient to result in a $3 loss because that each unit. Whereas the laser printer costs decrease substantially from $285 to $269 per unit as soon as using activity-based costing, causing a benefit of $81 every unit.

See more: Which Of The Following Best Explains Why The Stamp Act Of 1765 Was Significant?

The shift in overhead costs to the inkjet press is mainly a an outcome of the inkjet printer using 80 percent of the production run resources and thus gift assigned 80 percent of the overhead costs associated with manufacturing runs. The plantwide rate technique only assigned 60 percent of every overhead costs to the inkjet printer, consisting of those related to manufacturing runs (60 percent = 15,000 inkjet direct labor hours ÷ 25,000 complete direct labor hours).