Question

Fluff and​ Chop, Inc. is a manufacturer of decorative pillows. The company produces and sells two​ products: Square and Round.​ Currently, the company uses a traditional costing system to allocate manufacturing overhead to production based on machine hours. Management is considering switching to ABC to improve costing accuracy.

In their analysis of manufacturing​ overhead, management has identified two activities and cost​ pools: Machining and Machine Setup.​ $96,000 of the budgeted manufacturing overhead relates to the machine setup activity. Machine setup overhead costs are driven by number of setups.

The projected production levels for the upcoming period are​ 1,000 Square pillows and​ 5,000 Round pillows. The following information was compiled for the product​ lines:

	Square	Round
machine hours	0.9 hours per pillow	0.3 hours per pillow
setups	25 pillows per setup	25 pillows per setup

Which of the following statements is correct with regard to the above​ information?

A.

Under activity based​ costing, 50% of the machine setup manufacturing overhead costs will be allocated to the Round product line.

B.

The cost distortion per unit for both the Square and the Round product lines with respect to the machine setup manufacturing overhead costs is equal.

C.

The current costing system is undercosting both the Square and Round product lines with respect to machine setup manufacturing overhead costs.

D.

Under the current costing​ system, 75% of the machine setup manufacturing overhead costs will be allocated to the Square product line.

E.

None of the above statements are correct.

Answer 1

	Square	Round
As per ABC	$              16,000	$                80,000
As per Current System	$              36,000	$                60,000
Cost Distortion	$            (20,000)	$                20,000

Answer is E. None of the above statements are correct.