Question

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MedTech, Inc., manufactures and sells diagnostic equipment used in the medical profession. Its job costing system was designed using an activity-based costing approach. Direct materials and direct labor costs are accumulated separately, along with information concerning four manufacturing overhead cost drivers (activities). Assume that the direct labor rate is $25 per hour and that there were no beginning inventories. The following information was available for 2016, based on an expected production level of 371,429 units for the year:

Activity Cost Driver	Budgeted Costs for 2016			Cost Driver Used as Allocation Base	Cost Allocation Rate
Materials handling	$	3,200,000		Number of parts used	$	4.25	per part
Milling and grinding		9,000,000		Number of machine hours		12.50	per hour
Assembly and inspection		5,200,000		Direct labor hours worked		5.50	per hour
Testing		1,300,000		Number of units tested		3.50	per unit

The following production, costs, and activities occurred during the month of August:

Units Produced/Tested	Direct Materials Costs	Number of Parts Used	Machine Hours	Direct Labor Hours
54,000	$3,700,000	270,000	97,000	150,000

Required:

a. Calculate the total manufacturing costs and the cost per unit produced and tested during the month of August for MedTech, Inc. (Round "Cost per unit" to 2 decimal places.)

	Total manufacturing cost Cost per unit produced and tested

b. Which of the following are the advantages of the ABC approach relative to using a single predetermined overhead application rate based on direct labor hours. (Note: You do not have to calculate the overhead that would be applied for the month of August using this alternative method.) (Select all that apply.) ABC does not help in decision-making. ABC systems produce more accurate financial information. ABC approach is likely to provide better information to manufacturing managers. ABC helps in decision-making. ABC systems produce more accurate product costing information

Answer 1

Answer

A.

Total manufacturing cost and Cost per unit produced and tested:

Particulars	Amount
direct material	$3700000
direct labor(150000*$25)	$3750000
materials handling(270000*$4.25)	$1147500
Milling and grinding(97000*$12.50)	$1212500
Assembly and inspection(150000*$5.50)	$825000
Testing(54000*$3.50)	$189000
Total manufacturing cost	$10824000
Units	54000
Cost per unit produced and tested	$200.44

Total manufacturing cost:$10824000

Cost per unit produced and tested:$200.44

B.

ABC approach is likely to provide better information to manufacturing managers.

ABC systems produce more accurate product costing information

ABC helps in decision-making.

Explanation:

The ABC approach is likely to provide better information to manufacturing managers because the cost of overhead is based on those activities which generate factors for the cost. Therefore the management of manufacturing can give proper attention to important activities.

ABC systems produce more accurate product costing information which lead to better decision making.