x=5, y=3, z=6, t=5, Q-1) Company X produces dining chairs and tables. The follow
ID: 2545705 • Letter: X
Question
x=5, y=3, z=6, t=5,
Q-1) Company X produces dining chairs and tables. The following budget information is available: Item Dining Chairs Tables Total Cost Machine Setups Inspections Labor Hours 2x0 250 2,t00 600 TLAB,00 4z0 TL72,000 2,4g0 (a) (16 points) Compute total machine setups and inspection costs assigned to each product, using plantwide method if the allocation base is labor hours (b) (16 points) Compute total machine setups and inspection costs assigned to each product, using ABC. (c) (4 points) Should Company X use plantwide or ABC method? Why? ExplainExplanation / Answer
Base Data:
a) Under plantwide cost allocation method, a single allocation rate is used for all the products. Here it is based on labout hours.
Cost per hour = (48500+72000)/(2500+2430) = 24.442 per hour
Dining chairs = 2500*24.442 = 61,105
Tables = 2430*24.442 = 59,395
b) Under ABC costing method, the costs are allocated based on each activity's cost (here: Machine setup and Inspection):
Machine setup hourly raet = 48500/(250+600) = 57.059
Inspection hourly rate = 72000/(250+460) = 101.408
Cost of dining chairs = (250*57.059)+(250*101.408) = 39,616.75
Cost of Tables = (600*57.059)+(460*101.408) = 80,833.25
c) The company should use ABC method. Under Activity Based cost allocation method, the allocation to each product is based upon the activity used in production of each product. Since every activity's cost (labour per hour costing) might be different, allocating them based on activity utilization rate is a better method for product cost allocation than using a single blanket rate allocation as in the plantwide method.
Item Dining Chairs Tables Total Cost Machine Setups 250 600 48,500 Inspections 250 460 72,000 Labour Hours 2,500 2,430 120,500Related Questions
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