JMJ Enterprises
The JMJ Enterprises makes two models of networking equipment for the telecommunications industry. The Alpha and Omega products have annual sales volumes of 25,000 and 40,000 units, respectively. Historically, JMJ has used a traditional (absorption-based) cost accounting system based on direct-labor hours. The costs for the current year are:

Question

Model Omega	Model Alpha
$160,000	$350,000	Direct-material cost
600,000	125,000	Direct-labor cost
60,000	12,500	Direct-labor hours
		Total manufacturing indirect costs: $698,250

The company is considering a switch to ABC. It has identified six main activities that drive most of the manufacturing indirect costs. The activities, their indirect costs, drivers, and usage rates are:

Total Units	Model Omega	Model Alpha	Cost Driver	Costs	Activity
14,000	$9000	$5000	Machine hours	$280,000	Production
150	50	100	Engr. change orders	18,000	Engineering
90,000	40,000	50,000	Material moves	225,000	Material handling
1600	1000	600	Batches	12,000	Receiving
4500	2000	2500	Inspections	49,500	Quality assurance
65,000	40,000	25,000	Products	113,750	Pack and ship

Compare the total manufacturing costs for JMJ’s two models using the traditional and ABC methods.

Accepted Answer

Traditional Costing Method

Indirect cost rate = (Total indirect costs)/(Total direct-labor hours)
= $698,250/72,500 hours = $9.631 per direct-labor hour

	Model Omega		Model Alpha	Activity
	$160,000		$350,000	Direct material
	$600,000		$125,000	Direct labor
(= $60,000 · 9.631)	[latex] \underline{\$577,862} [/latex]	(= $12,500 · 9.631)	[latex] \underline{\$120,388} [/latex]	Allocated indirect
	$717,250		$595,388	Total
	$33.45		$23.82	Manufacturing cost/unit

ABC Method
Each applied activity rate equals the activity cost divided by the total activity level. For example, $280,000 for 14,000 machine hours is a cost of $20 per machine hour.

Model Omega	Model Alpha	Applied Activity Rate	Activity
$180,000	$100,000	$20/mach. hr.	Production
6,000	12,000	$120/engr. change order	Engineering
100,000	125,000	$2.50/move	Material handling
7,500	4,500	$7.50/batch	Receiving
22,000	27,500	$11/inspection	Quality assurance
70,000	43,750	$1.75/product	Pack and ship
385,500	$698,250 = 312,750		Total indirect
160,000	350,000		Direct material
600,000	125,000		Direct labor
1,145,500	787,750		Total
28.64	31.51		Manufacturing cost per unit

Model Omega	Model Alpha	Total Manufacturing Costs
$33.45	$23.82	Traditional costing system
28.64	31.51	ABC system

Question A.3: JMJ Enterprises The JMJ Enterprises makes two models of netw...

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