Question

Create Space produces yoga mats and props. The company currently allocates manufacturing overhead to production at a rate of​ $5.00 per direct labor hour.

In order to gain a better understand of how its products consume overhead​ resources, the company is considering using activity based costing for internal planning and decision making purposes. Two activities have been identified as generating​ 80% of the total budgeted manufacturing overhead. Information related to the two activities is as​ follows:

Activity	Cost Pool	Cost Driver Activity Level
Machine Setup	​$106,000	250 setups
Inspection	​$59,320	​1,000 inspection hours

The remaining overhead is attributable to general factory costs and will continue to be allocated based on direct labor hours.

If one of the​ company's products requires 50​ setups, 675 inspection​ hours, and​ 12,250 direct labor​ hours, is the product being overcosted or undercosted by the traditional system and by how much in​ total?

A.

undercosted by​ $12,241

B.

overcosted by​ $9

C.

undercosted by​ $8,616

D.

overcosted by​ $24,834

E.

undercosted by​ $1,720

Answer 1

Option A) is correct,

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