Case2: ABC Costing
Kiku Yamamoto is the controller of
Watanabe, Inc., an electronic controls company located in Osaka. She recently
attended a seminar on activity-based costing (ABC) in Tokyo. Watanabe’s
traditional cost accounting system has three cost categories: direct materials,
direct labor, and indirect producÂtion costs. The company allocates indirect
production costs on the basis of direct labor cost. The folÂlowing is the 20X0
budget for the automotive controls department (in thousands of Japanese yen):
Direct labor 35,000
Indirect production costs 24,500
After Ms. Yamamoto attended the seminar,
she suggested that Watanabe experiment with an ABC sysÂtem in the Automotive
Controls Department. She identified four main activities that cause indirect
proÂduction costs in the department and selected a cost driver to use as a
cost-allocation base for each activÂity as follows:
Activity Cost-Allocation Base Predicted 20X0 Cost (Â¥000)
Direct materials cost
Number of control units
Number of boxes shipped
In20X0 the Automotive Controls Department expects to
produce 92,000 control units, use 600 quality control hours, and ship 8,200
Explain how Watanabe, Inc., allocates its indirect production costs
using its traditional cost sysÂtem. Include a computation of the allocation
Explain how Watanabe, Inc., would allocate indirect production costs
under Ms. Yamamoto’s proposed ABC system. Include a computation of all the
allocation rates used.
Suppose Watanabe prices its products at 30% above total production cost.
An order came in fromNissan for 5,000 control units. Yamamoto estimates
that filling the order will requireÂ¥8,000,000of direct materials cost andÂ¥2,000,000 of direct
labor, It will require 50 hours of QC inspectiontime and will be shipped in 600 boxes,it. Compute the price charged for the
5,000 control units if Watanabe uses its traditional cost accounting system.
b. Compute the price charged for the 5,000
control units if Watanabe uses the ABC system proÂposed by Ms. Yamamoto.
4. Explain why costs are different in the two
costing systems. Include an indication of which costs you think arc most
accurate and why.