Does use of activity-based costing guarantee cost reduction

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Reference no: EM133922992

Problem

Kaui Company produces cellular phones. It has just completed an order for 80 phones placed by Many Hands Limited. Kaui recently shifted to an activity-based costing system, and its controller is interested in the impact the ABC system had on the Many Hands order. Data for that order are as follows: direct materials $36,950; purchased parts , $21,100; direct labour hours, 220; direct labour pay rate per hour, $15.
Under Kaui's traditional costing system, manufacturing overhead costs were assigned at a rate of 270% of direct labour cost.
Data for activity -based costing of the Many Hands order are as follows:

Activity                                 Cost Driver                        Activity Cost Rate                        Activity Usage
Electrical engineering Design   Engineering hours               $19 per engineering hour              32 engineering hours
Setup                                  Number of setups                $29 per setup                             11 setups
Parts production                   Machine hours                     $26 per machine hour                   134 machine hours
Product testing                     Number of tests                  $32 per test                            52 tests
Packaging                             Number of packages            $17 per package                          22 packages
Building occupancy                Machine hours                     $9.80 per machine hour               134 machine hours
Assembly                             Direct labour hours              $15 per direct labour hour            220 direct labour hours

Task

I. Use the traditional costing approach to compute the total cost and the product unit cost of the Many Hands Order.
II. Use ABC to compute the total cost and product unit cost of the order. Get the instant assignment help.
III. Does the use of activity-based costing guarantee cost reduction for every order?

Reference no: EM133922992

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