Comparative Analysis of Traditional and ABC Costing Systems

Based off of the data provided in the case study it would appear that under the traditional costing. Which are the cost that were incurred to produce OS-367. It appears that those cost were being allocated to GS-157 and HS-241. The cost per unit for OS-367 was $10 under the traditional costing system and the same has become $13.75 under the ABC system.

Compared to other product lines it appears that the OS-367 uses less machine hours. Because it uses less machine hours under the traditional system of allocation of overheads, a smaller share of overheads was allocated to OS-367.

There are several smaller drivers under the ABC system. A different cost driver is used for each category of overhead cost. Under the ABC system there appears to be a greater share of the total overheads that are allocated to OS-367. With the data provided in this particular case study and the calculated results of each system it appears that OS-367 uses some of the resources in greater proportions. Whereas the case study shows that other product lines might not. The overheads for such categories are allocated to OS-367 to a greater extent. Because of this the total overhead cost per unit has increased for the OS-367.

This particular case study provides data that shows that the product lines GS-157 and HS241 are generating a gross profit of more than 30 percent on sales revenue.

This was the desire of the company. It also shows that OS-367 OS-367 is not generating even 10 percent of the gross profit on the sales revenue. If management desires to maintain a profit margin of 30% based on the ABC costs. Then they would need to raise the selling price of OS-367 to at least $19.95. By doing this they would have opportunity to at least yield a gross profit of estimated

$4.55.

If the production should be stopped and the spare capacity that comes available should be used to produce GS-157 and HS-241 then management should discontinue producing OS-367. For this purpose, the company should find out whether the market can absorb these two product lines in greater quantities than at the present at the present selling price per unit. If it is possible to do so, the company should increase the production of GS-157 to the maximum possible extent because it has a greater profitability. Thereafter, if there is spare capacity available, the output of HS-241 should be increased. However, if the company is not able to sell any additional quantities of GS-157 and HS-241 it should continue to produce and sell OS-367 in the current quantities because the product is generating at least some profit.