AlpineEdge Ltd. manufactures two types of snowboards: GlideX and Summit. The company currently uses a plant-wide overhead allocation method based on labour hours, but it is considering switching to Activity-Based Costing (ABC) to improve cost accuracy.

The production process includes three main types of activities:

Board moulding

Finishing and binding installation

Quality control and packaging

The production team has provided the following estimates for the upcoming period:

Glide X Summit Pro Total
Budgeted Volume (units) 25,000 35,000 60,000
Total labour hours 16,000 20,000 36,000
Number of batches 10 25 35
Number of orders processed 100 150 250

The management accounting team has identified the following budgeted overhead costs and activity drivers:

Activity Budgeted Overhead Cost ($) Activity Driver
Board moulding $600,000 Number of batches
Finishing and binding installation $1,350,000 Number of labour hours
Quality control and packaging $450,000 Number of orders processed
Total Overhead $2,400,000

Data for this question is available in Excel here: Alpine_OH.xlsx
Download Alpine_OH.xlsx

Required:

Why does the overhead cost per unit for Glide X differ under the Activity-Based Costing method compared to the plant-wide allocation method?

Question

AlpineEdge Ltd. manufactures two types of snowboards: GlideX and Summit. The company currently uses a plant-wide overhead allocation method based on labour hours, but it is considering switching to Activity-Based Costing (ABC) to improve cost accuracy.

The production process includes three main types of activities:

Board moulding

Finishing and binding installation

Quality control and packaging

The production team has provided the following estimates for the upcoming period:

Glide X	Summit Pro	Total
Budgeted Volume (units)	25,000	35,000	60,000
Total labour hours	16,000	20,000	36,000
Number of batches	10	25	35
Number of orders processed	100	150	250

The management accounting team has identified the following budgeted overhead costs and activity drivers:

Activity	Budgeted Overhead Cost ($)	Activity Driver
Board moulding	$600,000	Number of batches
Finishing and binding installation	$1,350,000	Number of labour hours
Quality control and packaging	$450,000	Number of orders processed
Total Overhead	$2,400,000

Data for this question is available in Excel here: Alpine_OH.xlsx
Download Alpine_OH.xlsx

Required:

Why does the overhead cost per unit for Glide X differ under the Activity-Based Costing method compared to the plant-wide allocation method?

BlackTom AI · Accepted Answer

Question restatement: AlpineEdge Ltd. manufactures two snowboard types, GlideX and Summit Pro, and currently uses a plant-wide overhead allocation method based on labour hours. They are evaluating ABC to improve cost accuracy. The question asks: Why does the overhead cost per unit for Glide X differ under ABC versus the plant-wide method? Options:
1) The plant-wide method allocates overhead equally across all products regardless of how much they actually consume each type of activity
2) ABC uses estimated rather than actual costs, which introduces rounding errors that increase unit costs
3) The plant-wide method allocates overhead equally across all products regardless of how much they actually consume each type of activity
4) GlideX uses fewer direct materials, which makes ABC allocate more overhead to compensate for cost underestimation
5) The plant-wide method excludes indirect costs, while ABC includes both direct and indirect costs in product costing

Analysis of each option:
- Option 1: The plant-wide method allocates overhead equally across all products regardless of how much they actually consume each type of activity. This statement captures a key intuition about plant-wide costing: it uses a single cost driver (here, labour hours) that applies to all products without differentiating among the specific activities (board moulding, finishing/binding, quality control/packaging). Under ABC, overhead is allocated based on multiple activity drivers that reflect actual consumption of each activity by each product. Therefore, this option correctly highlights a fundamental difference that can cause Glide X’s overhead per unit to differ when switching from plant-wide to ABC. The rationale is that Glide X and Summit Pro consume activities at different rates (batches, labour hours, orders), so allocating via one driver masks these differences, whereas ABC reveals them.
- Option 2: ABC uses estimated rather than actual costs, which introduces rounding errors that increase unit costs. While ABC projects costs using budgeted or estimated activity rates, this is not a defining reason why Glide X’s per-unit overhead would differ from plant-wide. The question focuses on the structural difference between costing systems (drivers and cost pools), not on a general issue of estimation versus actuals. This statement exaggerates a methodological drawback and is not the primary cause of the observed difference in per-unit cost between the two methods.
- Option 3: The plant-wide method allocates overhead equally across all products regardless of how much they actually consume each type of activity. This option is essentially a restatement of Option 1 but with a potentially more explicit claim about equality across products. In practice, plant-wide costing does not allocate overhead equally per unit; it allocates based on a single driver, which can produce unequal totals across products depending on their use of that driver. The phrase "equally across all products" is an overgeneralization and can be misleading, making this option an inaccurate portrayal of plant-wide costing in many real-world contexts.
- Option 4: GlideX uses fewer direct materials, which makes ABC allocate more overhead to compensate for cost underestimation. ABC does not justify allocating more overhead to GlideX simply due to materials usage. ABC assigns overhead based on activities (batches, labour hours, orders) not directly on materials consumption. This option misstates how ABC drivers operate and introduces a false causal link between direct materials usage and ABC overhead allocation.
- Option 5: The plant-wide method excludes indirect costs, while ABC includes both direct and indirect costs in product costing. Both plant-wide and ABC allocate indirect costs; plant-wide uses a single pool of overhead (an indirect cost umbrella) allocated by a single driver, while ABC splits overhead into multiple activity-based pools. The claim that plant-wide excludes indirect costs is incorrect, so this option is not accurate as a description of the two methods.

Putting it together, Option 1 (as presented) identifies the core difference: plant-wide uses a single allocation base that applies similarly across products without considering the detailed activity consumption, whereas ABC traces costs to specific activities that vary by product. This structural distinction explains why Glide X’s overhead per unit can differ under ABC compared with the plant-wide method, since Glide X and Summit Pro may drive different levels of batches, labour hours, and orders, leading to different per-unit allocations under ABC versus the single-driver plant-wide approach.

22321 Cost Management Systems - Spring 2025 22321 Mid-semester Exam: Lecture 2 [EXAM]

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