Introduction
Businesses – from manufacturing, merchandising and service industries alike – take careful considerations for their costing systems. Setting-up competitive prices in the market can be a result of proper costing methods. Misallocation of costs may lead to incorrect price estimates, continuous production of unprofitable products, and ineffective processing schedules. In this case study, we will discuss the costing methods Zauner Ornaments are currently using and upon conclusion, it will enable us to distinguish the advantages and disadvantages of each costing method.

Case Context
The case seeks to assist Zauner’s comptroller, Yu Chia-yi, in determining the best costing method for their overhead costs, in addition to understanding the following concepts: 1. differences between traditional costing systems and activity-based costing, and 2. proper allocation of overhead costs with identification of activities and its associated costs.

Zauner Ornaments are launching three different products for their expansion. Yu doubts if the selling prices set by the Sales Department are enough to generate profit for each product line. Then, she analyzed the unit costs for their products to see if the selling prices can cover the product costs. Currently, Zauner allocates its factory overhead on the basis of production volume, but there is a significant loss per unit for the small colored glass ornaments. Their Operations Director, David Metz, suggests in contrast that overhead allocation based on prime costs (sum of direct material and direct labor costs) will result to lower product costs and therefore result to profits per product line.

Yu is convinced that both overhead allocations are not accurate enough to trace the costs associated to each product. As such, she tries to divide the support costs using the activity-based costing system.

Problem