This Is a Comprehensive Problem Comparing Absorption Costing and ABC.It

question 8

Multiple Choice

This is a comprehensive problem comparing absorption costing and ABC.It is suggested that as you progress through the problem,keep track of the correct solutions,because these values will be used again later in the problem set. Dehli Inkstone specializes in inkstone creation.Each finished inkstone needs 1½ pounds of special materials which cost $20 a pound.(One pound contains 16 ounces. ) Drilling requires 1 direct labor hour for which workers are paid $10 per hour,and 40 minutes of machine time.The preliminary product (a 'basic') is inspected to ensure that it is sound.Fifteen percent of the basics are rejected.It is not possible to rework these,and they have no salvage value.Each approved stone is handed to a master craftsperson who spends two hours making a 'Standard' product or three hours creating a 'Masterpiece'.Standards use half an hour of machine time and Masterpieces one hour.Finished inkstones are inspected again before packing.Four percent of finished products fail the final quality control assessment and are destroyed.Crafts persons are paid $18 per hour.It takes a 'basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton,which cost 50 cents in materials and weigh 6 ounces in total.
Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted.Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.
Dehli Inkstone recently employed a cost analyst,who recommended the adoption of an ABC system to obtain a more accurate understanding of the costs of the Standard and Masterpiece products.She has classified the overheads into the following four cost pools and identified the appropriate cost drivers:
$\begin{array}{lll}\text { Cost Pool}&\text { Dollars} \quad \quad \text { Cost Driver}\\\text { Materials handling } & \$ 121,000\quad \quad \text { Pounds of raw material } \\\text { Inspection } & \$ 48,400\quad \quad \quad \text { Inspections } \\\text { Machine operation \& maint. } & \$ 163,350 \quad \quad \text { Machine hours } \\\text { Labor-related costs } & \underline{\$ 254,650} \quad \quad \text { Direct Labor dollars }\\&\underline{\underline{\$587,400}}&\end{array}$
Independent of your answers above,assume total planned output is 25,595 units.What is the correct materials handling cost rate?

• A)$2.209 per lb.
• B)$2.521 per lb.
• C)$2.136 per lb.
• D)$2.572 per lb.
• E)None of the choices are correct

---

Definitions:

Times Interest Earned

A financial ratio that measures a company's ability to meet its debt obligations based on its earnings before interest and taxes.

Creditors' Protection

Legal and financial mechanisms designed to safeguard the interests and rights of creditors, ensuring they receive payment owed to them.

Effective Interest Rate

The real rate of interest earned or paid on a loan or investment over a period, taking into account the effect of compounding.

Interest Expense

The cost incurred by an entity for borrowed funds, considered a non-operating expense on the income statement.