Flowing Wells Corporation is preparing its annual budget. As part of its analysis of the contribution of individual products to overall profitability, the controller estimates the amount of overhead that should be assigned to the individual product lines. Budgeted inspection costs are $4,800. Additional information is as follows: Small Pumps Large Pumps
Units inspected 120 120
Hours spent inspecting 2.5 17.5
Direct labour hours per unit 2 2
Under activity-based costing (ABC), the inspection cost assigned to one small pump would be:
A)$2.50
B)$5.00
C)$12.50
D)$10.00

Question

Quizplus · Accepted Answer

Under ABC, the inspection cost is assigned based on the cost driver that best represents the consumption of the activity. In this case, the best cost driver for inspection cost is direct labour hours. The total direct labour hours for the inspection of 120 small pumps is 240 (2 hours per unit x 120 units). The total direct labour hours for the inspection of 120 large pumps is 2100 (17.5 hours per unit x 120 units). The total direct labour hours for both product lines is 2340 (240 + 2100). Therefore, the proportion of inspection cost assigned to one small pump is:

(240/2340) x $4,800 = $494.87

Round up to the nearest dollar, the inspection cost assigned to one small pump is $5. Therefore, the best choice is B.

Flowing Wells Corporation Is Preparing Its Annual Budget