It\'s About Time, Inc. manufacturers 2 lines of clocks: Digital and Analog. Unde
ID: 2333920 • Letter: I
Question
It's About Time, Inc. manufacturers 2 lines of clocks: Digital and Analog. Under the current costing system, manufacturing overhead is applied to each line based on machine hours. Machine Setup costs account for the majority of manufacturing overhead and are expected to total $75,000 for the upcoming period. The controller for the company has suggested to management that an activity based costing system be analyzed and has determined that the number of machine setups drives the total machine setup costs. The following information was compiled for the analysis:
Digital
Analog
Total Expected Machine Hours for Budgeted Output
1,500 hours
2,500 hours
Budgeted Output
750 clocks
500 clocks
Number of Clocks to be Produced per Machine Setup
25 clock
10 clocks
Which of the following statements is correct with respect to machine setup costs?
A. Since direct material and direct labor information are not given, it is impossible to determine if the product lines are being over/undercosted.
B. Under the activity based costing system, 37.5% of the machine setup manufacuring overhead costs are applied to the Analog product line.
C. Under the current costing system, 60% of the machine setup manufacturing overhead costs are applied to the Digital product line.
D. The current costing system is not over/undercosting the product lines with respect to machine setup costs.
E. If the Digital product line is being overcosted with respect to machine setup costs, it is likely that the Analog product line is also being overcosted with respect to machine setup costs.
Digital
Analog
Total Expected Machine Hours for Budgeted Output
1,500 hours
2,500 hours
Budgeted Output
750 clocks
500 clocks
Number of Clocks to be Produced per Machine Setup
25 clock
10 clocks
Explanation / Answer
Digital Analouge (a) Total expected machine hours for budgeted output 1500 hours 2500 hours (b) Budgeted output 750 clocks 500 clocks (c) Number of clocks to be produced [(b) / (c)] 25 clocks 10 clocks (d) Total machine set ups required 30 50 (e) Machine set up cost per machine hour (1500 hours X $18.75) (2500 hours X $18.75) $ 28,125 $ 46,875 (f) Machine set up cost pe set up (30 set ups X $937.5) (50 set ups X $937.5) $ 28,125 $ 46,875 Therefore, the cost distributed as per machine hours or set ups required are same. Correct statement is E As under both methods cost is distributed equally and if any higer or lower change occurs in cost it will effect both the costs with same ratio. Workings: Computation of cost per machine hour: (i) Machine overheads cost = 75,000 (ii) Total machine hours (1500 +2500) = 4,000 Cost per machine hour [(i)/(ii)] = $ 18.75 (iii) Total Machine set ups (30+20) = 80 Cost pe machine setup [(i)/(iii)] = $ 937.50
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