XYZ Systems specialize in servers for work group for work-group application. The company’s original job cost system has two direct cost categories: direct materials and direct labor. Overhead is allocated to jobs at the single rate of $22 per direct labor hour.

A task force headed by XYZ CFO recently designed an ABC system with four activities. The ABC system retains the current system two direct cost categories (Direct material and direct labor).
Thus, it budgets only overhead costs for each activity. Pertinent data follow:





ACTIVITY Allocation Base (Cost Driver) Cost allocation Rate
Material handling Number of parts $0.85
Machine set up Number of set ups $500.00
Assembling Assembling hours $80.00
Shipping Number of shipment $1,500.00

XYZ Systems has been awarded two new contracts that will be produced as Job A and Job B.
Budget data relating to the contracts follow:

Job A Job B
Number of parts 15,000 2,000
Number of set ups 6 4
Number of assembling hours 1,500 200
Number of shipment 1 1
Total direct labor hours 8,000 600
Number of output unit 100 10
Direct material cost $210,000 $ 30,000
Direct labor hour $160,000 $ 12,000

Requirement:
1. Compute the product cost per unit for each job using the original costing system (with two direct cost categories and a single overhead allocation rate)
2. Suppose XYZ Systems adopts the ABC system. Compute the product cost per unit for each job using ABC.
3. Which costing system more accurately assigns to jobs of the resources consumed to produce them? Explain.
4. A dependence company has offered to produce both jobs for XYZSystems for $5400 per output unit. The company may take advantage of this outsourcing. Which course of action will XYZ System take if they based their ecision on (a) the original system and (b) ABC system cost? Which course of action will yield more income? Explain?