1.
2. a. Under the traditional two stage costing system, the first step is to allocated overhead costs to
production departments, as the stage one in exhibit two, traced the overhead costs directly to two
production departments (fabrication and assembly), allocated them from pool S on the basis of
machine hours, and then assigned the summation of those two parts to two products basis on
labour hour. Secondly, as the stage two in the same exhibit, allocated overhead costs to each
product. Used the overhead rate form stage one to get the total overhead cost of $760,000 of CD1
and $480,000 of CD6, and then accumulated it with direct material and labour costs to get the total
costs for each product. Finally the cost per unit was calculated as $249.38 of CD1 and $ 220.83 of
CD6. The result is the sales price of $220 of CD6 cannot cover the cost of it as a loss of $0.83.
According to the giving information that CD1 costs the same amount of $20,000 of direct labour
hours as CD6 in fabrication department, although the cost of direct labour hour per unit of CD1 is
$5.6 ($45000/8000 units), which is lower than $5.8($35,000/6,000 units) per unit of CD6, under this
system CD6 is driving the amount of overhead allocated to that product.
Under the activities based costing system, firstly, assigned the overhead costs to five activity cost
pools. As the first part of exhibit four, used the percentages of costs in total costs for each product in
each activity to compute the total overhead costs, which are $783,560 of CD1 and $456,440 of CD6.
The second part is just like the same step in traditional costing system, as the second part of exhibit
four. The results are $262.32 per unit of CD1 and $203.57 per unit of CD6. Under this system CD1
has the loss of $2.32, it also indicated that CD1 account for higher percentage of costs in every
activity because it takes twice the setup hours.
The significant difference of those two systems is the first step. Under the traditional costing system
the overhead costs are allocated to production departments but it will be allocated to activities in
the ABC system. It is the main reason that makes the total overhead costs under ABC system is
$23,560 different from it is under traditional system. Because under traditional system only
allocated the cost in a simple way use fewer cost pools, in this system CD6 costs higher labour hours
but has the lower sales price which makes it become less profitable. However it cannot include the
best cost driver which that may contribute to the cost of product such as setup hours, which makes
CD1 become less profitable under ABC system.
b. Under the traditional system Zenon was making an operating margin of $10.63 on each CD1 but
under the ABC system it is actually making a loss of $2.32.