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- GIBSON ABC CASE STUDY ASSIGNMENT
Activity Based Costing Case Study Assignment Help Answer Gibson Networking develop software for internet applications and now its plan to develop X-PAGE and X-SECURE applications. Gibson has two options for costing that are activity-based costing system and single-allocation base costing system. The following table shows the information that will use for proposed ABC system.
Answer 1. Cost Allocation Rate Cost allocation rate for each activity can be calculated by using following formula. Cost allocation rate = Estimated total indirect cost of the activity ÷ estimated quantity of cost allocation base.
The calculation of cost allocation rate for each activity is summarized in the table below
Answer 2. Indirect Cost of Each Unit of New Applications Calculation of Indirect Cost of X-PAGE per unit: The following table shows the calculation of the indirect cost of each unit of X-PAGE application.
The above table indicates that indirect cost for per unit of X-PAGE allocation is $156600. Calculation of Indirect Cost of X-SECURE per unit: The calculation of per unit indirect cost of X-SECURE application is summarized in the following table.
According to calculation, per unit indirect cost for X-SECURE is $2235600. Assumption: (It is assumed that the cost of content production and testing activities are considered as indirect costs.)
Answer 3. Indirect Cost under Original System In the original single-allocation base costing system, the rate of indirect cost is $104 per programmer hour. The computation of indirect costs for both X-PAGE and X-SECURE under the original system is as follows: Indirect cost allocated to X-PAGE = Total programmer hours × rate of activity = 14000 × 104 = $1456000 Indirect cost allocated to X-SECURE = Total programmer hours × rate of activity = 21000 × 104 = $2184000
Answer 4. Comparison The following exhibit shows the indirect costs per unit of X-PAGE and X-SECURE under the ABC system and present costing system.
Above table explains that there are differences in the costs of both costing methods. In the case of X-SECURE, per unit indirect cost of production is higher under activity-based system as compared to original system due to difference in cost base. On the other side, indirect costs allocated to X-PAGE is higher under present costing system rather than activity-based system. It is also observed that there is a huge amount of difference in per unit indirect cost between both the methods.
Answer 5.
Disadvantages of Activity Based Costing System There are some disadvantages that Gibson Networking might find or face during the use of activity-based system rather than present single-allocation base costing system. These are as follows: The major disadvantage of using ABC system is that it is more expensive to develop and maintain within the organization as compared to traditional costing system. Activity-based system is more time consuming due to collection of data or information about different activities that needs huge amount of time. The costing information is easily misinterpreted by some users in this system that is another disadvantage of this system as compared to traditional single-allocation base costing system.
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