Reference 05-16
Washie Manufactures Two Types of Products for Washing

question 39

Multiple Choice

Reference 05-16
Washie manufactures two types of products for washing vehicles: the washing mitt, and the polishing cloth. Up to this point, Washie has been utilizing traditional costing with one plant-wide overhead rate using machine hours as the allocation base. The company has been receiving complaints that the polishing mitt seems over-priced. Management is wondering if there's merit to this claim since the washing mitt is a more complex product
compared to the polishing cloth. As such, management has gathered information on the potential activity areas to be used. $\begin{array}{|l|l|l|}\hline \text { Activity } & \text { Activity Measure } & \begin{array}{l}\text { Estimated } \\\text { Manufacturing } \\\text { Overhead Cost }\end{array} \\\hline \text { Design } & \text { Design hours } & \$ 12,000 \\\hline \text { Setups } & \text { Number of set-ups } & 40,000 \\\hline \text { Materials Handling } & \text { Meters of fabric } & 30,000 \\\hline \text { Production } & \text { Machine Hours } & 250,000 \\\hline\end{array}$
The company expected has determined the expected activity for each of the product lines:
During the year, the company sold 100,000 washing mitts and 50,000 polishing cloths. Direct costs are $\$ 8.00$ for washing mitts and $\$ 2.00$ for polishing costs.
$\begin{array}{|l|l|l|}\hline \text { Activity Measure } & \text { Washing Mitt } & \text { Polishing Cloth } \\\hline \text { \# of design hours } & 50 & 5 \\\hline \text { \# of setups } & 30 & 20 \\\hline \text { \# of meters of fabric } & 4,000 & 1,000 \\\hline \text { \# of machine hours } & 40,000 & 10,000 \\\hline\end{array}$
-What is the allocation rate for Setups using activity based Costing?

• A)$2,000
• B)$800
• C)$1,333
• D)$6,640

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Definitions:

Cash Basis

A financial recording approach where earnings and expenditures are acknowledged solely upon the actual exchange of cash.

Financing Activities

Transactions that involve raising capital, repaying investors, issuing stocks, or paying dividends as part of managing the company’s finances.

Net Cash

The amount of cash available after all cash inflows and outflows have been accounted for, typically within a specific period.

Operating Activities

Activities that relate to the primary operations of a company, such as selling products or providing services, as opposed to financing or investing activities.