Carter, Inc

Carter, Inc. uses a traditional volume-based costing system in which direct labor hours are the allocation base. Carter produces two different products: Product A, which uses 100,000 direct labor hours, and Product B, which uses 300,000 direct labor hours. Carter is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,000,000 across three activities: Design, Production, and Inspection. Under the traditional volume-based costing system, the predetermined overhead rate is $2.50/direct labor hour. Under the ABC system, the cost of each activity and proportion of the activity drivers used by each product are as follows: Required:
a. Calculate the indirect manufacturing costs assigned to Product A under the traditional costing system.
b. Calculate the indirect manufacturing costs assigned to Product B under the traditional costing system
c. Calculate the indirect manufacturing costs assigned to Product A under the ABC system.
d. Calculate the indirect manufacturing costs assigned to Product B under the ABC system.
e. Which product is under-costed and which is over-costed under the volume-based cost system compared to ABC?

Correct Answer:

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a. $250,000 = $2.50 × 100,000
b. $750,00...

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