ACa6111_______________________Fall 2013___________________________Assignment 2

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 produc­tion costs. The company allocates indirect production costs on the basis of direct labor cost. The fol­lowing is the 20X0 budget for the automotive controls department (in thousands of Japanese yen):

Direct materials ¥ 60,000

Direct labor 35,000

Indirect production costs 24,500

Totalcost ¥119,500

After Ms. Yamamoto attended the seminar, she suggested that Watanabe experiment with an ABC sys­tem in the Automotive Controls Department. She identified four main activities that cause indirect pro­duction costs in the department and selected a cost driver to use as a cost-allocation base for each activ­ity as follows:

Activity Cost-Allocation Base Predicted 20X0 Cost (¥000)

¥ 4,800

13,800

1,800

4,100

¥24,500

In20X0 the Automotive Controls Department expects to produce 92,000 control units, use 600 quality control hours, and ship 8,200 boxes.

1. Explain how Watanabe, Inc., allocates its indirect production costs using its traditional cost sys­tem. Include a computation of the allocation rate used.

2. 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.

3. 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 require¥8,000,000of direct materials cost and¥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 pro­posed 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.