Star Manufacturing, Contemplating the Adoption of an Activity-Based Costing System

question 69

Essay

Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company's products (H15, H16, and H17) follow:
$\begin{array}{l}\begin{array}{lll}\underline { \text { Cost Pool } }&\underline { \text { Cost Driver } }\\\text { Machine setup } & \text { Number of setups } \\\text { Quatity } & \text { Number of inspections } \\\text { assurance }\\\text { Engineering } & \text { Number of change } \\& \text { orders }\end{array}\begin{array}{lll}\underline{ \text { H15}}& \underline{ \text { H16}}& \underline{ \text { H17}}& \\50 \% & 20 \% & 30 \% \\70 \% & 15 \% & 15 \% \\\\15 \% & 10 \% & 75 \%\\\\\end{array}\end{array}$

Estimated costs for these three activities, which account for 80% of the firm's total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours.
Required:
A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary.
B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to products H15, H16, and H17 respectively.
C. Consider the company's current overhead application procedure.
1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
2. How accurate will the current costing procedure be given the nature of most of the company's activities? Briefly discuss.
3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.

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Definitions:

Perpetual Inventory Method

An accounting method that records the sale or purchase of inventory immediately through the use of computerized point-of-sale systems and enterprise asset management software.

General Journal Entry

A general journal entry is a record in the general journal that is used to document business transactions according to the double-entry bookkeeping system.

Perpetual Inventory Method

The perpetual inventory method continuously updates inventory records and cost of goods sold every time a transaction occurs.

General Journal Entry

The initial recording of financial transactions in the general journal, indicating the accounts and amounts to be debited and credited.