Excellent Printers has contracts to complete weekly supplements
required by forty-six customers. For the year 2018, manufacturing
overhead cost estimates total $840,000 for an annual production
capacity of 12 million pages.
For 2018 Excellent Printers has decided to evaluate the use of
additional cost pools. After analyzing manufacturing overhead
costs, it was determined that number of design changes, setups, and
inspections are the primary manufacturing overhead cost drivers.
The following information was gathered during the
analysis:
| Cost pool | Manufacturing overhead costs | Activity level |
| Design changes | $ 120,000 | 300 design changes |
| Setups | 640,000 | 5,000 setups |
| Inspections | 80,000 | 8,000 inspections |
| Total manufacturing overhead costs | $840,000 |
During 2018, two customers, Money Managers and Hospital Systems,
are expected to use the following printing services:
| Activity | Money Managers | Hospital Systems |
| Pages | 60,000 | 76,000 |
| Design changes | 10 | 0 |
| Setups | 20 | 10 |
| Inspections | 30 | 38 |
When costs are assigned using the single cost driver, number of
pages printed, then ________.
A. Money Managers will likely seek to do business with competitors
B. Money Managers is grossly under billed for the job, while other jobs will be unfairly over billed
C. Excellent Printers will want to retain this highly profitable customer
D. Money Managers is unfairly over billed for its use of printing resources
Answer. Excellent printer is using activity based costing for assign its manufacturing overhead cost using related cost driver, activity level etc. If Excellent Printer used single cost driver (number of pages printed) for allocation of its manufacturing overhead cost $840,000 than overhead cost will not correctly allocate to Money manager and Hospital system customer because Money Manager is printing 60,000 pages than 76,000 pages hospital system. However Money Manager is using higher cost pool activity than hospital system. For correct overhead cost allocation to customer, Excellent printer should use activity based costing system for it.
So Answer is ( B) Money Managers is grossly under billed for the job, while other jobs will be unfairly over billed.
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