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Company A manufactures 3 smartphones.Company A currently operates a traditional absorption costing system, but has decided to use an ABC system on a trial basis for its procurement operations. A time based cost driver is used to charge the procurement cost to the smart phones under the ABC system.The following costs have been determined using both systems.
—————————————–traditional costing————-ABC costing
smart phone 1—————————–$90 —————————-$108
smart phone 2—————————–$102 —————————$104
smart phone 3 —————————-$95 —————————–$85Place the following statements against each product..
smart phone 1……………………..
2……………………..
3……………………..* Smart phone uses a lot of parts and materials that are readily available. It does not require any special order. Only one supplier is involved, who is supplying company A for years. All components are readily available in the warehouse. Assembling the phone is very straightforward, does not incur any specific costs.
*This smart phone has relatively few components that are generally purchased in bulk. However, the camera components require a special order to a supplier overseas.
* This smartphone uses a lot of parts and materials that are difficult to obtain, so puts the buying department under pressure.
Sir, can you please briefly explain me how to compare the situations and find an ideal answer for each instances.
Kind regards
FathimaHi Fathima,
For this and your previous post – it would really help if you can post the model answer – and tell me which part you dont follow – this reduces the time to respond & saves me going over unnecessary technical points.Ok so Traditional Absorption costing will share the overheads (including procurement ) across all products on basis of labour hours or machine hours.
The ABC costing is going to allocate procurement overheads on the basis of how long each product requires in sourcing the parts. If procurement is a lengthy process for a particular product then this phone should get the largest share of procurement overhead costs.
So the phone which has lots of parts & materials which are difficult to obtain will be smart phone 1 ( the highest ABC cost)
The phone which is easy to assemble and has not special order will be the cheapest one under ABC costing – so smart phone 3
Therefore phone 2 is the remaining description. This is the trickiest one to determine which is why I answered in that order.
Many Thanks
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