At its Lyle Avenue plant, Milan Pasta produces two types of pasta: spaghetti and

Question

At its Lyle Avenue plant, Milan Pasta produces two types of pasta: spaghetti and fettuccine. The two pastas are produced on the same machines, with different settings and slightly different raw materials. The fettuccine, being a wider noodle and more susceptible to curling edges, requires more inspection time. The total daily cost of inspection is $500. Here are daily production data for the two products:

Required:

a. Calculate the inspection cost per pound of pasta using traditional absorption costing with number of machine hours as the allocation base.

b. Calculate the inspection cost per pound of pasta using activity-based costing. Assume inspection time is the cost driver.

c. Analyze why inspection costs differ between the methods used in (a) and ( b).

Explanation / Answer

. Calculate the inspection cost per pound of fettuccine using the traditional allocation base of machine hours (or minutes in this case). $0.20/lb.

OH rate = $500 = $0.25/min 0.1 min./lb. x 4,000 lb. + 0.8 min./lb. x 2,000 lb.

$0.25/min. x .8 min./lb. = $0.20/lb. !

A2. Calculate the inspection cost per pound of fettuccine using inspection time as the cost driver. $0.15/lb

. OH rate = $500 8 Inspection hours + 12 Inspection hours = $25/Inspection hour ! $25/Inspection hour x 12 Inspection hours = $0.15/lb.

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