Wize University Managerial Accounting Textbook > Activity Based Costing
Traditional Costing
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Traditional Costing
Traditional costing is a method of assigning manufacturing overhead to products using a single-cost driver, instead of per department like ABC. In this method, all the overhead costs must be pooled together and allocated using the cost-driver indicated in the question.
For example:
Instead of keeping overhead costs in each cost pool separate, under traditional costing they would be pooled together to total $750,000, and assuming we were using traditional costing with assembly as our single cost-driver, the overhead rate would be:
$750,000 / 100,000 = $7.50 per assembly
If a product requires 2 assemblies and 1 inspection, the overhead allocated would be found using only the assemblies since that is the cost driver used in finding the rate. So the overhead would be:
$7.50 x 2 = $15.00
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Example: Traditional Costing
JK Manufacturing Corp. produces two types of skis; Leisure and Pro. In order to determine how much should be charged for each type of ski, management has gathered the following data from its production facilities:
They plan to produce 3,000 units of the leisure skis and 2,000 units of the pro skis. Direct material costs are $150 and $175 for the Leisure and Pro ball respectively; and direct labour costs are $75 per unit for both types of balls.
Using traditional costing on the basis of machine hours, determine the total manufacturing cost per unit of the leisure ski and the pro ski.