Huge Company: Case Study 4.64
Today, more and more organizations prefer Activity-Based Costing System (ABC) to the functional-based costing system. ABC takes into account minute details regarding the activities and the factors that add up to the final cost. ABC is based on an activity hierarchy wherein the different activities influencing the cost build up are grouped into different categories. Such a costing method improves cost measurement by organizing information around activities (Thompson, 2003). The group will complete requirements (a) through (e) found at the end of the case. They will then, find three sources on the Internet, that compare and contrast activity-based costing and functional-based costing systems. And, to demonstrate, the group will discuss under what scenarios each system might lead to better decision making at Huge Company.
a.) Compute the costs of each job using the current cost system.
Total Labor cost $90,000,000
Total working hours per year $2,000
Total number of employees 1,000
Average cost per hour per person – 90,000,000/ (2,000 X 1,000) = $45.00/hour/person
Job 1: $45 X 22.50 labor hours = $1,000.30
Job 2: $45 X 160.00 labor hours = $ 7,200
Job 3: $45 X 21 labor hours = $945
Job 4: $45 X 120 labor hours = $ 5,400
Job 5: $45 X 60 labor hours = $2,700
b.) Recommend an alternate cost system that recognizes additional differences among jobs.
The activity based costing system improves the accuracy of product costs and addresses internal operating concerns. It provides for actual costs associated with each product produced by the organization. ( Dekker, 2003). Cost drivers are utilized replacing the genera ...