Cottonwood,Inc.produces two different products (Standard and Luxury)using two different activities: Machining,which uses machine hours as an activity driver,and Inspection,which uses number of batches as an activity driver.The cost of Machining is $500,000,while the cost of Inspection is $30,000.Standard uses 30% of total machine hours and 70% of total batches.What is the total activity cost assigned to Standard?
A)$22,500
B)$125,000
C)$171,000
D)$359,000

Question

Quizplus · Accepted Answer

First, we need to determine the activity rates for Machining and Inspection:
Activity rate for Machining = Total cost of Machining / Total machine hours = $500,000 / Total machine hours
Activity rate for Inspection = Total cost of Inspection / Total batches = $30,000 / Total batches

Next, we can use the activity rates and the activity drivers for each product to calculate the total activity cost assigned to each product:
Total activity cost assigned to Standard = (Activity rate for Machining x Machine hours used by Standard) + (Activity rate for Inspection x Batches used by Standard)
Total activity cost assigned to Luxury = (Activity rate for Machining x Machine hours used by Luxury) + (Activity rate for Inspection x Batches used by Luxury)

Since we are only looking for the total activity cost assigned to Standard, we can focus on the first equation:
Total activity cost assigned to Standard = (Activity rate for Machining x Machine hours used by Standard) + (Activity rate for Inspection x Batches used by Standard)
Machine hours used by Standard = Total machine hours x 30% = 0.3 x Total machine hours
Batches used by Standard = Total batches x 70% = 0.7 x Total batches

Plugging in the values, we get:
Total activity cost assigned to Standard = [(500,000 / Total machine hours) x 0.3 x Total machine hours] + [(30,000 / Total batches) x 0.7 x Total batches]
Total activity cost assigned to Standard = $171,000