Question-
Pretty Good Picture framing is costing a large job (no. 60) for a client. The current costing system allocates manufacturing overhead based on machine hours. However the accountant is considering introducing an ABC costing system and has obtained the following
information:
| Budgeted overhead (Costs) |
| Material handling |
$40,000 |
| Machine maintenance |
$231,000 |
| Product inspection |
$18,000 |
| TOTAL Mfg Overhear |
$289,000 |
| Buggeted quantity of cost drivers |
| Material moves |
$500 |
| Machine Hours |
10,000 |
| Inspections |
1,200 |
| JOB 60 |
| Number of materials moves |
10 |
| Machine hours |
40 |
| Number of inspections |
9 |
Required:
a) Describe which costing system is more accurate and explain why there are differences between traditional costing and ABC costing allocated amounts. Explain the need for these more modern (ABC) costing systems.
b) Some of the activities in the budget above may be classified as either value-added or non-value added or grey areas (partly value-added and partly non-value added).