Activity Based Costing
Reasons for ABC
An activity-based costing system may be appropriate for Wall Décor, when traditional overhead allocation based job-order costing system provides product line cost bias. For example, Greetings. INC has added a new product line, Wall Décor. However, they have noticeably raised their overhead costs by increasing their cost drivers. In this circumstance, Wall Décor should amend its costing system so that overhead costs will be allocated in such a way that parallels to either frame or unframed prints instead of taking into consideration the same overhead for both products.
ABC Overhead Rates
Activity / Est. Overhead / ...view middle of the document...
Website Optimization- framed $4.13/15,000/61,920
Framing and Matting costs $2.10 30,000 63,000
Total Overhead $150,420
Number of Prints 15,000
Overhead per print $10.03
Total cost $39.03
Lambeau Field (wood frame with mat)
Print Cost $20.00
Frame and Glass $6.00
Direct Labor ($0.2X10+$0.35X30) $12.50
Total cost $55.33
When the ABC system is applied to overhead allocated for unframed prints, it is established that the price is reduced. This occurs because unframed prints in working process utilize fewer resources from identified activity pools of the ABC system when weighed against framed prints. The potential implication of applying ABC system in to the retail chain is that there will not be product cost bias and will deliver more accurate pricing and a more accurate evaluation in relation to the profitability of the products.
Overhead Cost Related to Website Optimization
In order to show the amount of time spent on web optimization by IT between framed and unframed prints, total cost of web optimization activity has been split between unframed and framed classifications. Time of IT was distributed to the cost of unframed prints and framed prints. After distribution is identified, it is simple to see how much of the IT resources are being consumed by framed and matted prints, ensued by more truthful pricing.
There was a disparity of overhead cost between different framed products. To address this, the framed prints cost driver were divided into steel-framed prints and wood-framed prints with matting. The best option for Greetings Inc. was to...