Figure 4-21 Appleby Manufacturing uses an activity-based costing system. The company produces Model F and Model G. 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 F and G as given in the table below:
Appleby 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 the equally accurate reduced ABC system, using consumption ratios for labor related and batch inspections, what allocation rate would be used to assign labor related costs? (round to 5 decimal places)
A) 0.375
B) 0.60
C) 0.625
D) 0.40

Question

Figure 4-21 Appleby Manufacturing uses an activity-based costing system. The company produces Model F and Model G. 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 F and G as given in the table below:
 Appleby 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 the equally accurate reduced ABC system, using consumption ratios for labor related and batch inspections, what allocation rate would be used to assign labor related costs? (round to 5 decimal places)
A) 0.375 
B) 0.60 
C) 0.625 
D) 0.40

Quizplus · Accepted Answer

Under the reduced ABC system, the two most expensive activities for cost assignment are labor related and batch inspections, so we need to use consumption ratios for these two activities. 
For labor related costs: 
- Model F consumes 300 hours out of the total 400 hours of labor related activity, so the consumption ratio is 300/400 = 0.75 
- Model G consumes 100 hours out of the total 400 hours of labor related activity, so the consumption ratio is 100/400 = 0.25 
The allocation rate for labor related costs would be: 
(0.75 x $30,000 + 0.25 x $20,000) / (300 + 100) = $22.50 / hour 
Rounding to 5 decimal places, the allocation rate would be 0.375. Therefore, the best choice is A.

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