Question

Franklin Manufacturing manufactures two models of windows, bay windows and casement windows. Franklin uses an activity based costing system. The following information about the activities used to produce the company's products has been provided.

Estimated

Cost                      Cost Driver           Bay Windows      Casement

Unit-level            $   125,000          Labor hours           750                       500

Batch-level          $     75,000          Inspections            30                         20

Product-level       $     35,000          Storage Space       3,500 sq feet        2,100 sq feet

Facility-level       $   165,000          Machine hours      9,000                    6,000

If bay windows and casement windows require the same amount of direct labor, using labor hours as the allocation base for facility-level costs would:

	A.	undercost the casement windows.
	B.	overcost the bay windows.
	C.	undercost both the bay windows and casement windows
	D.	None of these answers is correct.

Answer 1

Please give positive ratings so I can keep answering. It would help me a lot. Please comment if you have any query. Thanks!

Franklin Manufacturing
Allocation of facility-level costs on the basis of machine hours:	Bay	Casement	Total	Note
Machine Hours	9,000.00	6,000.00	15,000.00	A
Facility-level costs			165,000.00	B
Allocation Rate			11.00	C=A/B
Costs allocated	99,000.00	66,000.00	165,000.00	D=C*A
Allocation of facility-level costs on the basis of labor hours:	Amount	Note
Facility-level costs	165,000.00	See B
Costs allocated to Bay (50%)	82,500.00	E=B*50%
Costs allocated to Casement (50%)	82,500.00	F=B*50%
Cost distortion	Bay	Casement	Note
Cost allocated on the basis of machine hours	99,000.00	66,000.00	G= See D
Cost allocated on the basis of labor hours	82,500.00	82,500.00	H= See E, F
Cost distortion	16,500.00	(16,500.00)	I=G-H
Remarks	Under allocated	Over allocated
So answer is option D. None of these answers is correct.