Final answer:
CBI's traditional costing system uses direct labor costs to allocate manufacturing overhead, which may not reflect the actual costs incurred for automated processing. Activity-based costing provides a more accurate reflection of costs by accounting for specific activities.
Step-by-step explanation:
Costing Systems in Business Case Study
Direct labor cost is a significant factor in traditional costing systems. However, in companies like CBI, where direct materials are the primary expense and manufacturing overhead is high due to automated processes, such methods can be misleading. The company's activity-based costing (ABC) may offer more accurate cost information by identifying activity cost drivers and their respective rates.
1. Using the simple costing system:
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- a. Overhead rate = Total Manufacturing Overhead / Total Direct Labor Cost = $3,00,000 / $600,000 = $5 per direct labor dollar.
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- b. Total cost per pound of Mauna Loa = Direct Material + Direct Labor + (Overhead Rate * Direct Labor) = $4.20 + $0.30 + ($5 * $0.30) = $4.20 + $0.30 + $1.50 = $6.00. Selling price = Total cost * 130% = $6.00 * 1.30 = $7.80.
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- Total cost per pound of Malaysian = Direct Material + Direct Labor + (Overhead Rate * Direct Labor) = $3.20 + $0.30 + ($5 * $0.30) = $3.20 + $0.30 + $1.50 = $5.00. Selling price = Total cost * 130% = $5.00 * 1.30 = $6.50.
2. Using the ABC method:
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- a. Cost of Mauna Loa per pound includes all activity costs divided by expected sales in pounds.
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- b. Cost of Malaysian per pound also includes determined activity-based costs per unit of product.
3. The activity-based approach gives a more accurate product cost by taking into account specific activities and costs associated with them, rather than spreading overhead evenly based on direct labor.