Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 45

Mattresses-A-Million produces Pillow-Top mattresses. They have been using a volume-based costing system to allocate overhead based on direct labor-hours. The Pillow-Top requires two hours of direct labor. The company has been allocating overhead at the rate of $10 per direct labor-hour. The accounting manager thinks the company should switch to ABC and recognize two activities—materials handling and setup. If the Pillow-Top Mattress requires 30 pounds of materials (materials handling costs are $0.10 per pound) and two setups at $5 per setup, what is the ABC cost per unit? According to the activity-based costs, how much was the cost of making a mattress overstated/understated?

Step 1 of 3

Activity based costing method which is commonly known as ABC method, is a costing method where indirect cost is assigned to product on the basis of activities identified, used in producing the product.