Question

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 $1316000 of total inspecting costs this year. How much of the inspecting costs should be allocated to the Basic model using ABC costing?

Answer 1

Computation of inspection costs to be allocated to basic model using ABC costing:

Total inspection cost incurred = $ 13,16,000

1. Basic model

Computation of number of inspections on number of units produced:

Number of inspections conducted for every 100 units = 1 inspection

Now total number of units produced = 3,400

Number of inspections = Total number of units produced /1 inspection per 100 units

                                            = 3,400 / 100

                                            = 34 inspections.

2. Luxury model

Computation of number of inspections on number of units produced:

Number of inspections conducted for every 10 units = 1 inspection

Now total number of units produced = 600

Number of inspection = Total number of units produced / 1 inspection per 10 units

                                           = 600 / 10

                                           = 60 inspections.

3. Total number of inspections = Basic model + Luxury model

                                                        = 34 inspections + 60 inspections

                                                       = 94 inspections

Computation of cost driver rate(ABC Costing) per inspection =( Total inspection cost / Number of

                                                                                                                   Inspections)

                                                                                                           = $ 13,16,000 / 94 inspections

                                                                                                           = $ 14,000

4. Computation of inspection cost allocated to basic model under ABC costing

             = Number of inspections * Cost per inspection

             = 34 inspections * $ 14,000

             = $ 4,76,000

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