Bender Electric Motors produces electric motors used by home appliance and other manufacturing companies. Each motor is built to customer specifications although the number of units requested may vary from 1 to as many as 2,000.
Bender has recently adopted an activity-based costing system with the following over-head costs and drivers.
Cost Pool Annual Amount Annual Activity Cost Driver
Direct labor related $400,000 $1,000,000 Direct labor cost
Material ordering $100,000 $5,000 Purchase orders
Material inspection $600,000 $4,000 Receiving reports
Equipment setup $200,000 $1,000 Setups
Quality control $400,000 $2,000 Inspections of motors
Machine related $800,000 $40,000 Machine hours
Miscellaneous $400,000 $4,000,000 Product costs other than
Total overhead $2,900,000
Recently the company received an order form Kromer’s Department Stores for 10 identical motors for usein a holiday display. Bender estimates the following costs and activities related to the order:
Material cost $500
Labor cost $200
Purchase orders 2
Machine hours 10
Note that the costs indicated are for all 10 motors-they are not per motor.
1. What is the traditional companywide overhead application rate?
2. WHat amount of overhead is applied to Kromer Deparment Store job above under the traditional companywide overhead method?
3. Calculate the cost of the Kromer Department Store job assuming the company used a traditional costing system?
4. Calculate the cost of the Kromer Department Store job using the new ABC system.
5. Briefly explain why overhead costs are higher or lower using the ABC system compared to the traditional companywide system above.