EXERCISE 8-6 (CONTINUED)

3. Under activity-based costing, a total of $1,500,000 is assigned to Model

X100 and a total of $500,000 is assigned to Model X200. This is in con-

trast to $1,600,000 for Model X100 and $320,000 for Model X200 under

the traditional costing method. Also note that the total amount of over-

head applied to both products is $2,000,000 under activity-based cost-

ing and $1,920,000 under the traditional costing method. A number of

reasons exist for these differences. First, not all manufacturing overhead

costs are assigned to products under activity-based costing. Apparently

$190,000 (= $1,920,000 – $1,730,000) of manufacturing overhead con-

sists of the costs of idle capacity and organization-sustaining costs that

are not assigned to products under activity-based costing. Counterbal-

ancing this, a total of $270,000 in nonmanufacturing costs are assigned

to products under activity-based costing, but not under the traditional

method. Additionally, manufacturing overhead costs have been shifted

from Model X100, the high-volume product, to Model X200, the low-

volume product under activity-based costing. This is probably due to the

existence of batch-level or product-level costs that are more appropri-

ately assigned under activity-based costing.

Per unit costs have changed under activity-based costing. This is

partly due to the exclusion of some manufacturing overhead from prod-

uct costs and the inclusion of nonmanufacturing overhead costs. But it is