Noland Company manufactures two models of its banjo, the Basic and the Luxury. The Basic model requires 10000 direct labor hours and the Luxury requires 30000 direct labor hours. The company produces 3400 units of the Basic model and 600 units of the Luxury model each year. The company inspects one Basic for every 100 produced, and inspects one Luxury for every 10 produced. The company expects to incur $1457000 of total inspecting costs this year. How much of the inspecting costs should be allocated to the Basic model using ABC costing

Question

Gizmo

Business

27 October, 15:27

Noland Company manufactures two models of its banjo, the Basic and the Luxury. The Basic model requires 10000 direct labor hours and the Luxury requires 30000 direct labor hours. The company produces 3400 units of the Basic model and 600 units of the Luxury model each year. The company inspects one Basic for every 100 produced, and inspects one Luxury for every 10 produced. The company expects to incur $1457000 of total inspecting costs this year. How much of the inspecting costs should be allocated to the Basic model using ABC costing

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Ralph Blake · Answer 1

Allocated inspection overhead = $527,000.

Explanation:

Activity-based costing is a form of absorption costing where overheads are charged to product using cost drivers.

Under this method, overheads are first analyzed and categorized by the activities responsible for them and then charged to product based on the amount of benefits enjoyed using cost drivers.

Activity rate per driver is calculated as:

Activity overhead for the period / Total cost drivers for the period

Number of inspection:

Basic model = 3400/100 = 34

Luxury model = 600/10 = 60

Total inspection = 94 inspections

Inspection cost per inspection = $1457000/94 = 15,500 inspections

Inspection to Basic model = 15,500 * 34 = $527,000.

Allocated inspection overhead = $527,000.