4.5: Differences based on factory overhead method
Although the total factory overhead applied, $54,600, is the same for all three methods, how it is allocated between the two jobs varies by method, as follows:
|
Single Factory |
Departmental |
ABC Costing |
|
|
Job 1: |
$38,220 |
$38,625 |
$37,500 |
|
Job 2: |
16,380 |
15,975 |
17,100 |
|
Total |
\(\ \overline{$54,600}\) |
\(\ \overline{$54,600}\) |
\(\ \overline{$54,600}\) |
ABC is the most specific strategy because it analyzes identifiable activities closely, resulting in more precise estimates of many of the elements of overall factory overhead. The results of the other two methods in the sample problem would overstate the amount of factory overhead that is applied to Job 1 and understate the amount for Job 2. When making decisions, such as determining a product’s selling price, it is critical to have sound cost information.