Appleby Manufacturing Uses an Activity-Based Costing System Jones Manufacturing Has Used Activity Based Costing to Assign Costs

question 19

Multiple Choice

Appleby Manufacturing uses an activity-based costing system. The company produces Model F and Model G. Information relating to the two products is as follows: $$\begin{array}{l}\begin{array} { l r r } & \text { Model F } & \text { Model G } \\\text { Units produced } & 24,000 & 30,000 \\\text { Machine hours } & 7,500 & 8,500 \\\text { Direct labor hours } & 8,000 & 12,000 \\\text { Material handling (number of moves) } & 4,000 & 6,000 \\\text { Setups } & 5,000 & 7,000 \\\text { Purchase orders } & 30 & 40 \\\text { Inspections } & 10,000 & 14,000 \\\text { Product line variations } & 8 & 12\end{array}\\\text { The following overhead costs are reported for the following activities of the production process: }\\\begin{array} { l r } \text { Material handling } & \$ 40,000 \\\text { Labor-related overhead } & 120,000 \\\text { Setups } & 60,000 \\\text { Product design } & 100,000 \\\text { Batch inspections } & 120,000 \\\text { Central purchasing } & 70,000\end{array}\end{array}$$ Jones manufacturing has used activity based costing to assign costs to Models F and G as given in the table below: $\begin{array}{|l|c|l|c|c|c|c|c|c|}\hline\text { Activity } & \text { Cost Pool } & \text { Driver } & \begin{array}{c}\text { Pool } \\\text { Rate }\end{array} & \begin{array}{c}\text { Model F } \\\text { Activity }\end{array} & \begin{array}{c}\text { Model F } \\\text { Cost }\end{array} & \begin{array}{c}\text { Model G } \\\text { Activity }\end{array} & \begin{array}{c}\text { Model G } \\\text { Cost }\end{array} & \text { Total } \\\hline \begin{array}{l}\text { Material } \\\text { handling }\end{array} & \$ 40,000 & 10,000 & \$ 4 & 4,000 & \$ 16,000 & 6,000 & \$ 24,000 & \$ 40,000 \\\hline \text { Labor related } & \$ 120,000 & 20,000 & \$ 6 & 8,000 & \$ 48,000 & 12,000 & \$ 72,000 & \$ 120,000 \\\text { overhead }\\\hline \text { Setups } & \$ 60,000 & 12,000 & \$ 5 & 5,000 & \$ 25,000 & 7,000 & \$ 35,000 & \$ 60,000 \\\hline \begin{array}{l}\text { Product } \\\text { design }\end{array} & \$ 100,000 & 20 & \$ 5,000 & 8 & \$ 40,000 & 12 & \$ 60,000 & \$ 100,000 \\\hline \begin{array}{l} \text { Batch }\\\text { Inspections }\end{array} & \$ 120,000 & 24,000 & \$ 5 & 10,000 & \$ 50,000 & 14,000 & \$ 70,000 & \$ 120,000 \\\hline \begin{array}{l} \text { Central }\\\text { purchasing }\end{array} & \$ 70,000 & 70 & \$ 1,000 & 30 & \$ 30,000 & 40 & \$ 40,000 & \$ 70,000 \\\hline\text { total }&&&&&\$209,000&&\$301,000&\$510,000\\\hline\end{array}$
Appleby Manufacturing wants to implement an approximately relevant ABC system by using the two most expensive activities for cost assignment.
Using ABC as the benchmark, what is the percentage error in the cost assigned to Model G using the approximately relevant ABC approach? (round to 4 decimal places)

• A)0.25%
• B)0.12%
• C)1.2%
• D)2.5%

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Definitions:

Long Run Adjustment

The process through which firms adjust their levels of production, capital, and other inputs to reach a new equilibrium in response to changes in market conditions over time.

Organic

Refers to products, especially food or farming methods, that are produced or conducted without the use of synthetic chemicals, fertilizers, or genetically modified organisms.

Profit

The financial gain realized when the amount of revenue gained exceeds the expenses, costs, and taxes involved in sustaining the activity in question.

Long Run Equilibrium

A state in an economy in which all factors of production and inputs can be varied, allowing firms to make adjustments and leading to the normalization of prices and output.