Question

It's About​ Time, Inc. manufacturers 2 lines of​ clocks: Digital and Analog. Under the current costing​ system, manufacturing overhead is applied to each line based on machine hours. Machine Setup costs account for the majority of manufacturing overhead and are expected to total​ $75,000 for the upcoming period. The controller for the company has suggested to management that an activity based costing system be analyzed and has determined that the number of machine setups drives the total machine setup costs. The following information was compiled for the​ analysis:

Digital	Analog
Total Expected Machine Hours for Budgeted Output	1,500 hours	​2,500 hours
Budgeted Output	750 clocks	500 clocks
Number of Clocks to be Produced per Machine Setup	25 clock	10 clocks

Which of the following statements is correct with respect to machine setup​ costs?

A. Since direct material and direct labor information are not​ given, it is impossible to determine if the product lines are being​ over/undercosted.

B. Under the activity based costing​ system, 37.5% of the machine setup manufacuring overhead costs are applied to the Analog product line.

C. Under the current costing​ system, 60% of the machine setup manufacturing overhead costs are applied to the Digital product line.

D. The current costing system is not​ over/undercosting the product lines with respect to machine setup costs.

E. If the Digital product line is being overcosted with respect to machine setup​ costs, it is likely that the Analog product line is also being overcosted with respect to machine setup costs.

Answer 1

		Digital	Analouge
(a)	Total expected machine hours for budgeted output	1500 hours	2500 hours
(b)	Budgeted output	750 clocks	500 clocks
(c)	Number of clocks to be produced [(b) / (c)]	25 clocks	10 clocks
(d)	Total machine set ups required	30	50
(e)	Machine set up cost per machine hour (1500 hours X $18.75) (2500 hours X $18.75)	$       28,125	$       46,875
(f)	Machine set up cost pe set up (30 set ups X $937.5) (50 set ups X $937.5)	$       28,125	$       46,875
	Therefore, the cost distributed as per machine hours or set ups required are same.
	Correct statement is E
	As under both methods cost is distributed equally and if any higer or lower change occurs in cost it will effect both the costs with same ratio.
	Workings:
	Computation of cost per machine hour:
(i)	Machine overheads cost	=	75,000
(ii)	Total machine hours (1500 +2500)	=	4,000
	Cost per machine hour [(i)/(ii)]	=	$         18.75
(iii)	Total Machine set ups (30+20)	=	80
	Cost pe machine setup [(i)/(iii)]	=	$       937.50