Question

Assume that a company makes only three products: Product A, Product B, and Product C. Currently, the company uses a conventional cost system that relies on plantwide overhead cost allocation based on direct labor-hours. It is considering replacing its conventional cost system with an activity-based costing (ABC) system.
The ABC system would include a total of four activities: Assembly (allocated to products based on direct labor-hours), Machine Setups (allocated to products based on number of setups), Material Handling (allocated to products based on the number of material moves), and Product Design (allocated to products based on the number of products).

Product A Product B Product C
Number of units produced 1,000 units 7,000 units 2,000 units
Direct labor hours per unit 2 hours 2 hours 2 hours
Number of setups 30 setups 50 setups 20 setups
Number of material moves 600 moves 400 moves 200 moves
Number of products 1 product 1 product 1 product

Using the activity-based costing approach, what percent of the company’s total Material Handling activity cost would be allocated to Product B?

a. 70%
b. 25%
c. 40%
d. 33%

Answer 1

Answer:

Company A

Using the activity-based costing approach, the percent of the company’s total Material Handling activity cost that would be allocated to Product B is:

 

d. 33%

Explanation:

a) Data and Calculations:

                                               Product A   Product B    Product C   Total Use

Number of units produced   1,000 units  7,000 units 2,000 units   10,000

Direct labor hours per unit        2 hours        2 hours       2 hours            6

Number of setups                  30 setups    50 setups   20 setups        100

Number of material moves  600 moves 400 moves  200 moves    1,200

Number of products                1 product     1 product     1 product           3

Product B usage of Material Handling Activity Cost:

Allocation Basis = Number of material moves

Product B material moves = 400

Total material moves = 1,200

Therefore, the percentage of Product B usage of material handling activity is:

= 400/1,200 * 100

= 33%