Teledyne Isco Manufacturing ABC Analysis
Activity: Cost Total Qty of cost driver
DM Add costs 56,000 280,000 0.2
No. of Prod runs 60,480 60 1,008
No. of inspections 85,120 19 4,480
Total 201,600
DL
DM
Total Cost
Units Produced
Total per unit
Overhead rate 201600/224000 0.9
Large Pump Small Pump
120,960 80,640 FOH
134,400 89,600 DL
179,200 100,800 DM
434,560 271,040 Total
$48.50 $121 Total per unit
Divide cost by
qty = ABC rate
a. How much overhead will be assigned to each product if these three cost drivers are used to allocate overhead? What is the total cost per unit produced for each product?
The ABC analysis shows the small pump is significantly more expensive per unit, mostly due to higher inspection and production runs.
b. How much of the overhead will be assigned to each product if direct labor cost is used to allocate overhead? What is the total cost per unit produced for each product?
The traditional costing under-costs the small pump compared to ABC and over-costs the large pump.
c. Write a memo to the marketing manager explaining why the large pump might be experiencing resistance in the market along with your
recommendation for which costing system to use.
Dear Marketing Manager,
Following your request I have reviewed the production costs of both of our pumps, small and large using both the traditional costing method (based
on the direct labour) and Activity-Based Costing (ABC) based on the activities performed and identified cost drivers. The findings show important
insights into the pricing and perceived market value of each product.
Key Findings:
Under the traditional approach. overhead is allocated based solely on direct labour and thus, assigns: $120,960 in overhead to the Large Pump
($48.50 per unit) and $89,640 in overhead to the Small Pump ($121 per unit).
However, using ABC, which consideres actual cost drivers (material used, production runs and inspections), the allocations shifts to $91,840 in
overhead to the Large Pump ($45.25 per unit) and $109,760 in the overhead to the Small Pump ($134 per unit).
Large Pump Small Pump
Traditional (current Costing) $120,960 $89,640
per unit $48.50 $121
ABC Method $91,840 $109,760
per unit $45.25 $134
In my findings the traditional method we are currently using overstates the costs of the Large Pump, while undrestating the true cost of the Small
