Traditional Costing vs. ABC system Managerial Accounting Question

Question

A company is considering the adoption of an ABC system because the managers suspect that their traditional costing system distorts product costs. The company produces and sells two products, Standard and Deluxe. Their traditional costing system uses machine hours as the allocation base for manufacturing overhead cost. The production managers decided that the major activities are Assembly, Machine Setups, and Parts Administration and determined the costs for each activity. They also identified how many machine hours, setups, and parts each product requires.

Additional info:

Price : Standard : $120 per unit , Deluxe : $150 per unit

Cost :

Direct Materials : Standard : $32 per unit Deluxe : $36 per unit

Direct Labor : Standard : $15 per unit Deluxe : $25 per unit

Units Produced : Standard : 200,000 units Deluxe : 100,000 units

Activity:

Assembly (Machine Hours) : Standard : 100,000 Deluxe : 200,000

Machine Setups : Standard : 100 Deluxe : 400

Parts Administration :  Standard : 200 Deluxe : 200

Overhead :

Assembly Cost : $1,200,000

Machine Setups : $900,000

Parts Administration : $300,000

 

Question 1) Compared with the unit product cost calculated by the ABC system, what is the distortion (difference) created by the traditional costing system for Deluxe Product

A) Product undercosted by $0.35 per unit

B) Product overcosted by $0.35 per unit

C) Product undercosted by $0.70 per unit

D) Product overcosted by $0.70 per unit

E) None

Answer was C) but I need help with steps as to why.

Question 2) The company is assumed to spend equal money on customer relations among its two customers A and B. Total costs of customer relation for these two customers are $10,000. Customer A placed an order as below. Using the ABC system, the customer margin of customer A is (choose closest answer):
Standard : 100 units

Deluxe : 250 units

A) $44,960 B) $45,100 C) $20,010 D) $20,150 E) $25,010

Answer was C) but I need help with steps as to why

Question 3) Which of the following statements is correct?

A) Compared with the ABC method, the traditional method overcosts both Standard and Deluxe product

B) Compared with the ABC method, the traditional method undercosts both Standard and Deluxe product

C) Compared with the ABC method, the traditional method undercosts Standard and overcosts Deluxe

D) Compared with the ABC method, the traditional method overcosts Standard and undercosts Deluxe

E) None

Answer was D) but I don't get why.

Answer 1

 Question 1:

Objective: We aim to compare the Deluxe product's cost analysis between the traditional costing system and the Activity-Based Costing (ABC) system to identify any distortion.

 

1. Traditional Costing System:

   - Total Overhead Costs: $2,400,000

   - Product cost for Deluxe: $77 per unit

 

2. ABC System:

   - Total ABC Cost per unit for Deluxe: $228

   - Distortion: $151 per unit

 

Question 2:

Objective: We'll calculate the customer margin for Customer A using the ABC system.

1. Total Revenue: $49,500

2. Total Cost using ABC for Customer A: Standard and Deluxe costs

3. Customer Margin: Total Revenue minus Total Costs for Standard and Deluxe, and any customer costs.

 

Question 3:

Objective: We'll evaluate the statements based on cost analysis from ABC and Traditional methods.

1. Overhead allocation may lead to undercosting for standard and overcosting for deluxe.

 

Final Answers:

1. Product under cost by $0.70 per unit.

2. Customer A's margin is $20,010.

3. Given the over/undercosts shown in previous questions, the most likely answers are C or D.