Preview

Lehigh

Satisfactory Essays
Open Document
Open Document
515 Words
Grammar
Grammar
Plagiarism
Plagiarism
Writing
Writing
Score
Score
Lehigh
2. The profits are different because the costs are allocated differently in the three methods.

In the standard-cost method, steel profits were a function of prices, costs and volume. Product weight (pounds) was the primary unit of measure for standard cost, which included materials, labor, direct manufacturing expense and overhead cost categories. Direct material and direct labor are based on the bill of materials and routings. Direct manufacturing costs were allocated to products based on machine hours. Indirect manufacturing and administrative costs were allocated to products based on pounds produced. It averages the diverse resource use by different products.

The ABC followed a two stage methodology by using resource drivers and allocating activities to products and customers using cost drivers appropriate to the activity. The material costs and direct labor are the same with the standard cost method. All the indirect costs are related to the product through a causal relationship, so the cost rates are different for different activities. In the standard cost method, the cost rates for direct manufacturing expenses are the same for all the activities and manufacturing and administrative overhead is allocated evenly among different products.

TOC only involves material costs, and all the overhead costs are the same among different products and fixed.

3. In ABC, the product mix was decided on the basis of profitability of each product and the production of the most profitable product was maximized. It doesn’t consider the time and the opportunity cost of utilizing the bottleneck resources. TOC takes into consideration the effect of the most critical resource in finalizing the product mix. It maximizes the product which gives maximum profit on utilizing one unit of the critical resource.

In Lehigh’s case, Lehigh should not base its product mix decision on either ABC or TOC solely. In the case, the bottleneck process of each of the product line is

You May Also Find These Documents Helpful

  • Satisfactory Essays

    Costing methodology: The two different cost allocation methods – Plant-wide cost allocation based on direct labor hours (LHM) and Activity-Based Costing (ABC) – provide substantial different results. These results are shown in Exhibits 1, 2a, and 2b. Due to the characteristics of SDM operations and its cost structure – three different labels, with high incidence of non-labor costs – I recommend to use the ABC method for allocating the overhead costs.…

    • 780 Words
    • 3 Pages
    Satisfactory Essays
  • Powerful Essays

    Activity Based Costing Method (ABC). ABC determines and allocates cost by activities a company executes. This generally happens in four steps: identify each activity and its associated costs, both total and indirect; estimated cost driver and quantity; allocation computation; and cost allocation to the respective activity. ABC refines the way indirect costs are allocated to production and focuses on the costs of each individual activity. Costs are also further assigned to each product within the activities and each activity has its own cost driver. Because of the specificity, active based costing provides a…

    • 1900 Words
    • 7 Pages
    Powerful Essays
  • Satisfactory Essays

    (B) A good example of how ABC systems are better than the traditional costing systems is represented in the case of Hammer Products, Inc. In order to compare them, we first need to calculate the total cost per unit under each costing system, and then determine how much money each product will generate; also known as profit margin per unit. The first step to compute the total cost per unit under the traditional costing system is to determine the predetermined overhead rate that will be used in calculating the manufacturing overhead per unit. As shown in exhibit1, the predetermined overhead rate is obtained by dividing the total estimated manufacturing overhead cost for the year by the total estimated number of hours applied to production. In this case, the predetermined overhead rate turned out to be $48dlh; which means that for every hour spent on the production of these products, $48 will be applied to manufacturing overhead. Once the predetermined overhead rate is determined, we can figure out how much money has been applied to each, single unit of production by multiplying the predetermined overhead rate by the number of direct labor hours that it took to produce each unit. Then, if we add the direct materials and direct labor amounts that were previously given to the manufacturing…

    • 399 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Michigan Auto Parts

    • 963 Words
    • 4 Pages

    The suitable method for firms dealing with multiple products is Activity Based Costing (ABC) Method. Under this method Overheads of a particular activity or product is related using cost drivers and common overheads are allocated on a suitable basis. In case of multiple cost drivers ,the most prominent or dominant cost driver is used.…

    • 963 Words
    • 4 Pages
    Good Essays
  • Satisfactory Essays

    Mgmt 122 Case 1

    • 487 Words
    • 2 Pages

    In the field of accounting, activity-based costing and traditional costing are two different methods for allocating overhead costs to products. In traditional costing systems, all manufacturing costs are assigned to products whether or not they are caused by the products. Furthermore, nonmanufacturing costs are not assigned to products, even those nonmanufacturing costs that are caused by the products. On the other hand, in activity based costing, nonmanufacturing costs as well as manufacturing costs may be assigned to products. Another difference is that in traditional costing the entire factory may have only one overhead cost pool and one measure of activity such as direct labor hours, while activity based costing has a number of overhead cost pools, each of…

    • 487 Words
    • 2 Pages
    Satisfactory Essays
  • Good Essays

    Absorption based costing method (ABC) is used by companies to identify activities that it performs and then assigns direct and indirect costs to the product’s overall pricing. This method helps businesses determine the cost drivers that influence the product’s sales price by increase or decrease. ABC uses cost drivers, such as, direct labor, direct material along with transaction-based drivers. In this way, long-term variables overheads, traditionally considered fixed costs, can be traced to products (AICPA, 2014). The process used when applying the ABC method…

    • 712 Words
    • 3 Pages
    Good Essays
  • Satisfactory Essays

    Chapter 11

    • 6884 Words
    • 35 Pages

    A firm's __________ can be defined as the actions that managers take to attain the goals of the firm.…

    • 6884 Words
    • 35 Pages
    Satisfactory Essays
  • Good Essays

    Wilkerson

    • 584 Words
    • 3 Pages

    The overhead costs were allocated to products as a percentage of production-­‐run direct labor cost with a rate of 300%. 2. Develop an activity-­‐based cost model using the information in the case. Provide best estimate about the cost and profitability of Wilkerson’s three product lines.…

    • 584 Words
    • 3 Pages
    Good Essays
  • Powerful Essays

    Chaper 5 Study Guide

    • 11148 Words
    • 45 Pages

    If the usage of project activities is not proportional to the number of units produced, then some managers…

    • 11148 Words
    • 45 Pages
    Powerful Essays
  • Good Essays

    The assignment of the manufacturing costs (manufacturing towels, customising and other factory overhead) towards product groups will be taken as a given and will not be re-allocated because the company has full confidence in the accuracy of these figures. However, in order to reveal the true profitability of the three customer accounts we will examine & re-allocate the costs regarding selling and administrative expenses towards the customer groups. We will use for this the ABC approach. The steps to take in ABC analysis are the following ones [Slagmulder, 2010]: 1. Identify the key activities…

    • 2295 Words
    • 10 Pages
    Good Essays
  • Satisfactory Essays

    Managerial Analysis 17

    • 450 Words
    • 4 Pages

    D) Both methods estimate overhead costs related to production and then assign these costs to products based on a cost-driver rate. The differences are in the accuracy and complexity of the two methods. Traditional costing is more simplistic and less accurate than ABC, and typically assigns overhead costs to products based on an arbitrary average rate. ABC is more complex…

    • 450 Words
    • 4 Pages
    Satisfactory Essays
  • Better Essays

    As companies and organizations, they need to choose proper marketing tools what are depend on their orientation. So, “marketing mix” is often crucial when determining a product or brand 's offer. Normally, “marketing mix,” means McCarthy‘s 4Ps theory, which is included Price, Product, Promotion, and Place. Afterward, the 4Ps have been expanded to the 7Ps and even more. There is another theory, which is called 4Cs; Robert F. Lauterborn put this theory forward. This theory is involved Customers’ wants and needs, Cost, Communication and Convenience, different with…

    • 1628 Words
    • 7 Pages
    Better Essays
  • Powerful Essays

    Sippican Corp

    • 1240 Words
    • 5 Pages

    Consider Sippican is a manufacturer company with multiple products, using simple cost accounting system that directly allocate factory overhead to unit of product entirely through one single allocation base (i.e. 185 % of production run direct labor cost in this case) is although an inexpensive way while is sometimes distort actual contribution of the product. To our understanding from reading the article, Sippican is spending more on overhead than on either direct material or direct labor. Further, Sippican has considerable diversity in its product mix. Each product may contain different degree of spending on indirect or supporting resources, and high variety on product and consumer characteristics. As such, activity-based cost system is considered to be a more accurate costing of present resource that will enable Sippican to project its future resource demands more effectively.…

    • 1240 Words
    • 5 Pages
    Powerful Essays
  • Good Essays

    Classic Pen Company

    • 727 Words
    • 3 Pages

    Material and direct labour are variable costs which are directly proportional to the production units therefore can be kept as is.…

    • 727 Words
    • 3 Pages
    Good Essays