Kiku Yamamoto is the controller of Watanabe, Inc., an electronic controls company located in Osaka.She recently attended a seminar on activity-based costing (ABC) in Tokyo. Watanabe’s traditional cost accounting system has three cost categories: direct materials, direct labor, and indirect production costs. The company allocates indirect production costs on the basis of direct labor cost. The following is the 20X0 budget for the automotive controls department (in thousands of Japanese yen:
Direct materials ¥ 60,000
Direct labor 35,000
Indirect production costs 24,500
Total cost ¥119,500
After Ms. Yamamoto attended the seminar, she suggested that Watanabe experiment with an ABC system in the Automotive Controls Department. She identified four main activities that cause indirect production costs in the department and selected a cost driver to use as a cost-allocation base for each activity as follows:
Activity Cost-allocation Base Predicted 20X0 cost (000)
Receiving Direct materials cost 4800
Assembly No. of control units 13800
Quality control QC hrs 1800
Shipping No. of boxes shipped 4100
Total 24500
In 20X0 the Automotive Controls Department expects to produce 92,000 control units, use 600 quality control hours, and ship 8,200 boxes.
1- Explain how Watanabe, Inc., allocates its indirect production costs using traditional cost system. Include a computation of the allocation rate used.
2- Explain how Watanabe, Inc., would allocate indirect production costs under Ms. Yamamoto's proposed ABC system. Include a computation of all the allocation rate used.
3- Suppose Watanabe prices its products as 30% above total production cost. An order came in from Nissan for 5000 control units and 2000,000 of direct labor. It will require 50 hours of QC inspection time and will be shipped in 600 boxes.
a. Compute the price charged for the 5000 control units if Watanabe uses its traditional cost accounting system.
b. Compute the price charged for the 5000 control units if Watanabe uses the ABC system proposed by Ms. Yamamoto.
4- Explain why costs are different in the two costing systems. Include an indication of which costs you think are most account and why.
