EXERCISE 5-12 (30 MINUTES)

5. The shipyard job requires 270 machine-hours. At ¥2.24 per machine-hour, the electrical cost actually caused by the job would be only ¥604.80. This contrasts with the electrical cost of ¥3,171 under the old cost system and ¥2,835 under the new ABC system. Both the old cost system and the new ABC system grossly overstate the electrical costs of the job. This is because under both cost systems, the large fixed electri-cal costs of ¥63,528 per week are allocated to jobs along with the elec-trical costs that actually vary with the amount of work being done. In practice, almost all categories of overhead costs pose similar problems. As a consequence, the costs of individual jobs are likely to be seriously overstated for decision-making purposes under both traditional and ABC systems. Both systems provide acceptable cost data for external report-ing, but both provide potentially misleading data for internal decision-making unless suitable adjustments are made.