ABC Analysis

 

Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications.  The company’s original job costing system has two direct cost categories: direct materials and direct labor.  Overhead is allocated to jobs at the single rate of $22 per direct labor hour.

 

A task force headed by Harris’s CFO recently designed an ABC system with four activities.  The ABC system retains the current system’s two direct cost categories.  Thus, it budgets only overhead costs for each activity.  Pertinent date follow:

 

 

Harris Systems has been awarded two new contracts, which will be produced as Job A and Job B.  Budget date relating to the contracts follow:

 

 

 

 

  1. Compute the product cost per unit for each job, using the original costing system (with two direct cost categories and a single overhead allocation rate).

  2. Suppose Harris Systems adopts the ABC system.  Compute the product cost per unit for each job using the ABC.

  3. Which costing system more accurately assigns to jobs the costs of the resources consumed to produce them?  Explain.

  4. A dependable company has offered to produce both jobs for Harris for $5400 per output unit.  Harris may outsource (buy from the outside company) either Job A only, Job B only, or both jobs.  Which course of action will Harris’s managers take if they base their decision on (a) the original system? (b) ABC system costs:  Which course of action will yield more income?  Explain.

 

  • Compare and contrast ABC costing and traditional costing methods, giving examples.
  • In the assigned case, which system provides a more accurate picture of the cost incurred to produce the jobs?
  • Provide examples of manufacturers in your geographic area and explain which system would be best for them.

 

Respond to each directive or question in 1–2 paragraphs. Apply current APA standards for writing style to your work.

 

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