This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. ) Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic') is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers:
$$587,400‾‾\begin{array}{lll}\text { Cost Pool}&\text { Dollars} \quad \quad \text { Cost Driver}\\\text { Materials handling } & \$ 121,000\quad \quad \text { Pounds of raw material } \\\text { Inspection } & \$ 48,400\quad \quad \quad \text { Inspections } \\\text { Machine operation \& maint. } & \$ 163,350 \quad \quad \text { Machine hours } \\\text { Labor-related costs } & \underline{\$ 254,650} \quad \quad \text { Direct Labor dollars }\\&\underline{\underline{\$587,400}}&\end{array}$
Independent of your answers above,assume total planned output is 25,595 units.What is the correct materials handling cost rate?

A) $2.209 per lb.
B) $2.521 per lb.
C) $2.136 per lb.
D) $2.572 per lb.
E) None of the choices are correct

Question

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. ) Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic') is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers:

$587,400‾‾\begin{array}{lll}\text { Cost Pool}&\text { Dollars} \quad \quad \text { Cost Driver}\\\text { Materials handling } & \$ 121,000\quad \quad \text { Pounds of raw material } \\\text { Inspection } & \$ 48,400\quad \quad \quad \text { Inspections } \\\text { Machine operation \& maint. } & \$ 163,350 \quad \quad \text { Machine hours } \\\text { Labor-related costs } & \underline{\$ 254,650} \quad \quad \text { Direct Labor dollars }\\&\underline{\underline{\$587,400}}&\end{array}

Independent of your answers above,assume total planned output is 25,595 units.What is the correct materials handling cost rate?

A) $2.209 per lb.
B) $2.521 per lb.
C) $2.136 per lb.
D) $2.572 per lb.
E) None of the choices are correct

Marigold Palos · Accepted Answer

Final Answer : C, Explanation :  The materials handling cost pool is allocated using the cost driver of pounds of raw material. We know that each finished inkstone needs 1.5 pounds of special materials, so for 25,595 units, we would need 25,595 * 1.5 = 38,392.5 pounds of raw material.To find the materials handling cost rate, we divide the total materials handling costs by the total pounds of raw material:$121,000 / 56,500 lbs = $2.136 per lbTherefore, the correct answer is C.

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