Roland's company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year, just as had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality Inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems:
If Roland uses ABC, then what will the net operating income be for the cotton scarves? (Do not round the calculations.)
This more of a problem than an multiply choice question.
I have updated the question to ask for the net operating income, which cut down on the amount of work being completed by the student.
A) $140,964.30
B) $159,660.00
C) $164,624.30
D) $208,970.00

Question

Roland's company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year, just as had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality Inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems:
 If Roland uses ABC, then what will the net operating income be for the cotton scarves? (Do not round the calculations.)
This more of a problem than an multiply choice question.
I have updated the question to ask for the net operating income, which cut down on the amount of work being completed by the student.
A) $140,964.30 
B) $159,660.00 
C) $164,624.30 
D) $208,970.00

Quizplus · Accepted Answer

This question requires several steps in order to determine the MOH allocated to either of the scarves. First, calculate an activity-based rate for each key activity based upon the total cost in activity cost pool divided by the total quantity of activity's cost driver from both scarves. Folding, $19,420.00/(6,250 + 7,100) = $1.45 per DL hour; Cleaning/Maintenance, $10,330.00/(1,200 + 1,500) = $3.83 per cleaning/maintenance hour; and Quality Inspections, $4,600.00/(600 + 800) = $3.29 per inspection. Now, allocate based upon the cotton scarf activity: ($1.45 × 7,100) + ($3.83 × 1,500) + ($3.29 × 800) = $18,695.70 total MOH allocated to the cotton scarves. Next, calculate net operating income: $208,970.00 - $23,660.00 - $25,650.00 - $18,695.70 = $140,964.30 (Choice A).

Roland's Company Makes and Sells Scarves, and He Has Just