Problem:
Alfred Auto parts, Inc., previously used a cost system that allocated all factory overhead costs to products based on 350 percent of direct labor cost. The company has just implemented an ABC system that traces indirect costs to products based on consumption of major activities as indicated below. Compare the total annual costs of Product X using both the traditional volume-based and the new ABC systems.
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Annual Cost Driver
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Product X Cost
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Activity
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Quantity
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cost
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Driver Consumption
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Labor
Machining
Setup
Production order
Material handling
Parts administration
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$300,000
20,000 hours
10,000 hours
2,000 orders
1,000 requisitions
12,000 parts
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$ 30,000
$500,000
$100,000
$200,000
$ 20,000
$480,000
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$10,000
800 hours
100 hours
12 orders
5 requisitions
18 parts
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