Stevie has been allocating Manufacturing Overhead (MOH) costs to her products using a single plant-wide rate of $14.00 per Direct Labor (DL) hour. A recent job required 347 DL hours, 42 production runs, 25 quality inspections, and 20 factory supervisor hours. Based on the increased activity, the accountants are suggesting a transition to Activity-Based Costing (ABC) and have suggested the following rates:
Materials Handling: $9.75 per direct labor hour
Production Setup: $18.50 per production run
Quality Inspections: $6 per inspection
Factory Supervisor Wages: $12.30 per supervisor hour
Assuming that Stevie makes the switch to ABC, what is the difference in MOH costs that would be reported under the previous plant-wide rate compared to the ABC rates?
A) $301.75 less costs allocated under ABC
B) $301.75 more costs allocated under ABC
C) $2,210.25 less costs allocated under ABC
D) $2,210.25 more costs allocated under ABC

Question

Quizplus · Accepted Answer

This question first requires calculation of the MOH cost based on the single plant-wide rate: ($14.00 × 347 DL hours) = $4,858.00. Now, calculate the MOH cost under suggested ABC rates: ($9.75 × 347 DL hours) + ($18.50 × 42 production runs) + ($6.00 × 25 inspections) + ($12.30 × 20 supervisor hours) = $3,383.25 + $777.00 + $150.00 + $246.00 = $4,556.25. Next, compare the two MOH cost: $4,858.00 - $4,556.25 = $301.75. The difference of $301.75 represents the underallocated costs under the ABC (Choice A).

Stevie Has Been Allocating Manufacturing Overhead (MOH) Costs to Her