Figure 4-21 Jones Manufacturing uses an activity-based costing system.The company produces Model X and Model Y.Information relating to the two products is as follows:
The following overhead costs are reported for the following activities of the production process:
Jones manufacturing has used activity based costing to assign costs to Models X and Y as given in the table below:
Jones Manufacturing wants to implement an approximately relevant ABC system by using the two most expensive activities for cost assignment.
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Refer to Figure 4-21.Under this new approach, what is the new pool rate for batch inspection costs?
A) 0
B) $5
C) $10.625
D) $15.525

Question

Figure 4-21 Jones Manufacturing uses an activity-based costing system.The company produces Model X and Model Y.Information relating to the two products is as follows:
 The following overhead costs are reported for the following activities of the production process:
 Jones manufacturing has used activity based costing to assign costs to Models X and Y as given in the table below:
 Jones Manufacturing wants to implement an approximately relevant ABC system by using the two most expensive activities for cost assignment.
-
Refer to Figure 4-21.Under this new approach, what is the new pool rate for batch inspection costs?
A) 0 
B) $5 
C) $10.625 
D) $15.525

Quizplus · Accepted Answer

Under the new approach, the two most expensive activities are machine setups and batch inspections. The pool rate for machine setups is $90 per setup hour, and the pool rate for batch inspections is $212.50 per inspection. Since we are only using the two most expensive activities, we only need to consider these two pools.
The total setup time for both models is 80 setup hours (40 setup hours for Model X and 40 setup hours for Model Y). Therefore, the total cost for setup activities is $90 x 80 = $7,200. 
The total number of batch inspections for both models is 75 inspections (25 inspections for Model X and 50 inspections for Model Y). Therefore, the total cost for batch inspection activities is $212.50 x 75 = $15,937.50.
The new pool rate for batch inspection costs is determined by dividing the total cost for batch inspection activities by the total number of batches inspected, which is 75. 
Thus, the new pool rate for batch inspection costs is $15,937.50 ÷ 75 = $212.50 per batch inspection.
Therefore, the correct answer is C) $10.625.

Figure 4-21 Jones Manufacturing Uses an Activity-Based Costing System