Traditional vs ABC Costing: Kalder ProductsKalder Products manufactures two component parts, AJ40 and
AJ60. AJ40 components are being introduced currently, and AJ60 parts have been
in production for several years. For the upcoming period, 1,000 units of each
product are planned for manufacturing. Assume that the only relevant overhead
cost is for engineering change orders (any requested changes in product design
or the manufacturing process). AJ40 components are expected to require four
change orders, and AJ60 only two. Each AJ40 requires 1 machine hour, and each
AJ60 requires 1.5 machine hours. The cost of a change order is $300.A. Estimate
the cost of engineering change orders for AJ40 and AJ60 components if Kalder
uses a traditional costing method and machine hours as the allocation base.B. Now
suppose that Kalder uses an ABC system and allocates the cost of change orders
using as cost driver the number of change orders. Estimate the cost for change
orders for each unit of AJ40 and AJ60.
C. Calculate
the difference in overhead allocated to each product. This figure represents
and amount that one product cross-subsidizes the other product. Explain what
that means.
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