Accounting for Decision Making and Control 6th Edition by Jerold Zimmerman

Exercise 1

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 ).