Review The Decision Case 1 Harris Systems On Page 94

Review The Decision Case 1 Harris Systems Located On Page 942 943 In

Review the Decision Case 1 (Harris Systems) located on page 942-943 in your textbook. Answer the four case questions in the Requirements section of the case. In addition, address the following in one to two paragraphs: Compare and contrast ABC costing and traditional costing methods, giving examples. In the assigned case, which system provides a more accurate picture of the cost incurred to produce the jobs? Provide examples of manufacturers in your geographic area and explain which system would be best for them.

Respond to each directive or question in 1–2 paragraphs. Apply current APA standards for writing style. Harris Systems specializes in servers for workgroup, e-commerce, and ERP applications. The company’s original job costing 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 Harris’s CFO recently designed an ABC system with four activities. The ABC system retains the current system’s two direct cost categories. Thus, it budgets only overhead costs for each activity. Pertinent data follows:

• Activity: Material handling — Allocation base: Number of parts — Cost allocation rate: $0.85
• Activity: Machine setup — Allocation base: Number of setups — Cost allocation rate: $500.00
• Activity: Assembling — Allocation base: Assembling hours — Cost allocation rate: $80.00
• Activity: Shipping — Allocation base: Number of shipments — Cost allocation rate: $1,500.00

Harris Systems has been awarded two new contracts, producing Job A and Job B. Budget data relating to the contracts follows:

Paper For Above instruction

The case of Harris Systems presents a comprehensive scenario for analyzing the differences between traditional and activity-based costing (ABC) systems. The primary focus is on understanding how each system allocates costs to manufacturing jobs, influencing managerial decisions on pricing, budgeting, and outsourcing. This paper computes product costs under both systems for Jobs A and B, evaluates which method provides more accurate cost attribution, and assesses the implications for Harris’s strategic choices regarding outsourcing to external vendors.

1. Traditional Costing Method Analysis

The traditional costing system in Harris Systems allocates overhead based on a single rate of $22 per direct labor hour. Under this approach, the overhead cost assigned to each job is calculated by multiplying total direct labor hours by this rate. For Job A, with 80 direct labor hours, overhead allocation equals 80 hours × $22/hour = $1,760. For Job B, with 10 direct labor hours, overhead equals 10 hours × $22/hour = $220. The total product cost per unit is derived by summing direct materials, direct labor, and allocated overhead, then dividing by the number of units produced.

Specifically, for Job A, total costs include $220,000 in direct materials, $160,000 in direct labor, and $1,760 in overhead, summing up to $381,760 for 100 units, resulting in a per-unit cost of $3,817.60. Similarly, Job B's costs amount to $30,000 in direct materials, $12,000 in direct labor, and $220 in overhead, totaling $42,220 for 10 units, or $4,222 per unit. These calculations reveal that traditional costing tends to allocate overhead uniformly based on labor hours, potentially obscuring the costs associated with specific activities or resource consumption.

2. Activity-Based Costing (ABC) Method Analysis

Implementing ABC involves assigning overhead costs more precisely according to different activities. Harris’s ABC system identifies four activities, each with specific cost drivers and rates. The costs allocated by activity to each job are calculated by multiplying the number of activity drivers by their respective rates. For example, material handling costs for Job A are 15,000 parts × $0.85 = $12,750, while for Job B, it is 2,000 parts × $0.85 = $1,700. Similar calculations are performed for machine setup, assembling, and shipping activities.

Aggregating these activity-based costs yields a more nuanced total overhead for each job. For Job A, overhead costs include setup ($500 × 6 = $3,000), assembling (1,000 hours × $80 = $80,000), shipping (1 × $1,500 = $1,500), and material handling ($12,750). The total overhead per Job A amounts to $97,250, and for Job B, the overhead totals $10,000 (setups), $16,000 (assembling), $1,500 (shipping), and $1,700 (material handling), summing to $29,200. Dividing total costs (materials + labor + overhead) by units produces a more accurate per-unit cost, reflecting resource consumption specific to each activity.

3. Comparing Costing Systems for Accuracy

The ABC system provides a more precise allocation of overhead costs because it identifies and assigns costs based on actual activities that consume resources, unlike traditional systems that use a single rate based solely on labor hours. For Harris, where different jobs may vary significantly in their use of materials, setups, and shipping, ABC captures these differences effectively. As a result, ABC yields a clearer picture of the true costs associated with each job.

For example, Job A, with a high number of parts and setups, incurs substantial activity-specific costs that ABC captures more accurately. Conversely, the traditional system may under- or over-allocate costs because it does not differentiate between activities. In manufacturing settings—such as in a machine shop or custom fabricator—where complex and diverse jobs are common, ABC tends to provide management with better insights for pricing, product mix decisions, and cost control (Cooper & Kaplan, 1991). Therefore, in Harris’s case, ABC offers more reliable cost data, supporting better strategic decision-making.

4. Outsourcing Decision Based on Costing System

Harris's decision to outsource jobs depends on comparing internal costs to external supplier bids. The external company offers a price of $5,400 per output unit. For Job A, which produces 100 units, the total internal cost using the traditional system is 100 units × $4,222 = $422,200, which far exceeds the outsourcing cost of $540,000. Similarly, for Job B, 10 units × $4,222 = $42,220, also significantly less than the outsourcing bid. Under the traditional costing approach, Harris would prefer to produce internally, as the costs are less than outsourcing.

Using the ABC system, the detailed cost per unit is more accurate and may influence the decision differently. If ABC analysis indicates that the actual costs per unit are higher due to activity-specific overheads—for instance, if high setup and material handling costs are significant—the internal cost might increase further, reinforcing the decision to outsource. Conversely, if ABC reveals lower true costs, Harris might still prefer internal production. Typically, cost-based outsourcing decisions tend to favor whichever system shows the lower cost estimate—if ABC costs are higher, then outsourcing is a better option, potentially increasing profitability. If traditional costs undervalue resources used, Harris might erroneously decide to keep manufacturing in-house, which could be less profitable.

Conclusion

In conclusion, the adoption of ABC over traditional costing provides Harris Systems with a more detailed and accurate allocation of overhead costs, facilitating better managerial decisions related to pricing, outsourcing, and process improvements. The ABC system's granularity ensures that cost distortions common in traditional methods are minimized, improving cost control and profitability analysis. For manufacturing firms with complex production processes and varied resource consumption—like custom machinery or specialized electronics—ABC is often the superior approach. Harris’s strategic use of ABC can lead to more informed decisions that enhance competitiveness and financial outcomes.

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