Attached Document is a complete copy of the problem:
Explain the differences between traditional costing and activity-based costing (ABC);
Provide a brief explanation about the application procedures of ABC for Advising Technologies, Inc based on its information of overhead costs;
Discuss required questions, including:
Using the data provided by the controller, prepare cost calculation for both product lines using ABC to see whether there is any significant difference in their unit cost (please refer to the solution below).
Calculations of activity costs per cost driver unit:
Selling: $8,000,000/32,000 days = $250 per day
Design: $3,000,000/40,000 hours = $75 per hour
Creative services: $5,500,000/125,000 hours = $44 per hour
Customer service: $2,000,000/80,000 calls = $25 per call
ABC cost assignments:
Published
On-Line
Selling:
Publishing - 28,500 days × $250 =
$7,125,000
Online - 3,500 days × $250 =
$ 875,000
Design:
Publishing - 35,000 hours × $75 =
2,625,000
Online - 5,000 hours × $75 =
375,000
Creative Services:
Publishing - 100,000 hours × $44 =
4,400,000
Online - 25,000 hours × $44 =
1,100,000
Customer Service:
Publishing - 72,000 calls × $25 =
Online - 8,000 calls × $25 =
1,800,000
_________
200,000
Total ABC cost assignments
15,950,000
2,550,000
Total production units
200,000
10,000,000
ABC unit cost assignment
79.75
0.26
Traditional indirect cost assignments
49.00
0.77
Difference
$ 30.75
$ (0.51)
Total ABC production costs:
Published ($105 direct + $79.75 ABC) $184.75
Online ($0.50 direct + $0.26 ABC) $0.76
Total Traditional Production Costs:
Publishing ($105 direct + $49) $154
Online ($0.50 direct + $0.77 indirect) $1.27
Should ATI give up trying to compete in the "Online" market?
Does the charge of predatory pricing seem valid? (Predatory pricing involves selling below cost to try to drive the competition from the market.)
Why are customers willing to pay a higher price to get publishing services?
Do traditional costing and ABC lead to similar conclusions?
4) Briefly conclude your work/findings.