The Jaffar Company produces lawn mowers and is considering to shift to
activity-based costing. Its controller, Orville Flattengartner, is
interested in using a recent order for 100 mowers sold to Davis Lawn and
Garder to compare traditional costing with activity-based costing. The
costs for this order consist of direct materials of $4,000, purchased
parts of $10,000, 120 direct labor hours at an average direct labor pay
rate of $20 per hour, and a manufacturing overhead rate of 150% of
direct labor costs.
In addition, Orville has collected the following information:
Activity Activity Cost Rate Cost Driver Level
Parts production $5 per machine hour 200 machine hours
Assembly $10 per direct labor hour 120 direct labor hours
Packaging & shipping $15 per unit 100 units
Work cell setup $100 per setup 3 setups
Required:
1) (10 pts) Using the traditional costing approach, a) compute the
total production costs and b) product unit cost for the order
2) (10 pts) Using activity-based costing, a)compute the total production costs and b) product unit cost for the order.
3) (5 pts) What is the difference between the product unit cost using
the traditional method versus the activity-based costing method? Which
method do you think is the better representation of "true costs"? Why?
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