How much of the setup costs are allocated to the Mini model using ABC costing?

Hale Company manufactures two models of its couch, the Mini and the Maxi. The Mini model requires 10000 direct labor hours and the Maxi model requires 40000 direct labor hours. The company produces 4000 units of the Mini model and 1000 units of the Maxi model each year. The company produces the Mini model in batch sizes of 200, while it produces the Maxi model in batch sizes of 100. The company expects to incur $135000 of total setup costs this year. How much of the setup costs are allocated to the Mini model using ABC costing?

$67500

$27000

$90000

$112500

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Expert Solution

Based on the information, we can calculate the setup costs that are allocated to the Mini model using ABC costing as follows:-

The setup costs should be allocated based on the number of batches each model produced during the year.

Mini model produces 4,000 units and is produced in batch sizes of 200

No. of batches of Mini model = 4,000 units/200 units per batch = 20 batches

No. of batches of Maxi model = 1,000 units/100 units per batch = 10 batches.

Total no.of batches = 20 batches + 10 batches = 30 batches.

Setup cost per batch = $135,000/30 batches = $4,500 per batch

Setup costs allocated to Mini model = $4,500 per batch * 20 batches = $90,000

Setup costs allocated to Mini model = $90,000

Based on the above calculation, the correct answer is Option C - $90,000.

Option A, Option B and Option D are incorrect based on the above considerations as they represent different costs than the actual cost allocated to the Mini model using ABC costing.

ekkarill92 answered 1 year ago

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