Problem: Auto Detail Company manufactures two basic types of production: vinyl and metallic adhesive-backed striping used by automobile manufacturers. The company traditionally has allocated manufacturing overhead to its product line using direct labor hours as a cost driver. More recently, the company has explored the use of two additional cost drivers as it evolves into an activity-based costing system. The following data summarize overhead application drivers and rates for the traditional and activity-based cost system.
Traditional: $175 per direct labor hour
Activity-based cost:
$120 per direct labor hour
$345 per machine changeover
$100 per inspection
Per Production Run
Vinyl Striping Metallic Striping
Direct Labor Hours 10 hours 8 hours
Batch Size 180 rolls 65 rolls
Number of Inspections 0 3
A. Calculate the overhead cost per roll to manufacture the vinyl striping and the metallic striping using the traditional method.
B. Calculate the overhead cost per roll to manufacture the vinyl striping and the metallic striping using the activity-based cost method.
C. Explain the cause or causes of the differences in cost for each product when using traditional and ABC methods.