Question

1. Whitman Printing has contracts to complete weekly supplements required by forty-six customers. For the year 20X5, manufacturing overhead cost estimates total $840,000 for an annual production capacity of 12 million pages.

For 2010, Whitman Printing decided to evaluate the use of additional cost pools. After analyzing manufacturing overhead costs, it was determined that the 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
Design changes	$120,000	200 design changes
Setups	640,000	4,000 setups
Inspections	80,000	16,000 inspections
Total manufacturing overhead costs	$840,000

       

        During 2010, 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	2
Setups	20	10
Inspections	30	38

       When costs are assigned using the single cost driver, number of pages printed, then Hospital Systems will ___?

1. Will contribute too little to profits, and Wallace Printing will not want to accept additional work from the company.
2. Will likely seek to do business with competitors
3. Is grossly under billed for the job, while other jobs will be unfairly over billed.
4. Is fairly billed because resources are allocated uniformly to all jobs.

Answer 1

Cost assigned to Hospital Systems under single rate = Rate*Pages printed

= (840,000/12,000,000)*76000

= $5,320

Cost assigned under ABC = (120,000/200)*2 + (640,000/4000)*10 + (80,000/16000)*38

= $2,990

Hence, When costs are assigned using the single cost driver, number of pages printed, then Hospital Systems will

1. Will contribute too little to profits, and Wallace Printing will not want to accept additional work from the company.

As costs allocated are too high than what it should be (As per ABC), profits will be low or NIL