Activity-based costing
Here is the Ralston problem for example.
Ralston's Machining produces specialized equipment. Currently, overhead costs are allocated at a rate of $5 per machine hour produced and the company used 20,000 machine hours last year.
Ralston's CEO has heard about ABC, and would like to see if it makes any difference in the costs allocated to jobs at the company.
The accounting staff has provided the following information about manufacturing overhead:
Amount Cost Driver
Setups $30,000 Number of setups
Equipment 20,000 Number of machine hours
Inspection 50,000 Number of inspection
The company estimates that it will perform 150 setups and 1,000 inspections each year and will use 2,000 machine hours. Job CRT will require 18 setups, 85 machine hours, and 60 inspections.
A. Using ABC, what amount of manufacturing overhead will be allocated to Job CRT?
B. What amount would Ralston allocate to job CRT using their current, traditional system?
C. Why do the two methods yield such different answers?