This Is a Comprehensive Problem Comparing Absorption Costing and ABC

question 6

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 hours, 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.
Which is the full (absorption) cost of a Standard inkstone, if machine hours are used as the cost driver? (Allow a little for rounding errors) .

• A)$94.81
• B)$101.89
• C)$107.25
• D)$107.88
• E)None of the above

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Definitions:

Chemical Molecules

Groups of atoms bonded together, representing the smallest fundamental units of a chemical compound that can take part in a chemical reaction.

Morphine

A potent opiate analgesic derived from the opium poppy, used medically to relieve severe pain.

Heroin

Heroin is an opioid drug synthesized from morphine that is illegal and has high potential for addiction and dependence.

Opiates

A group of drugs, derived from opium, used for their analgesic (pain relief) properties, but which also have a high potential for addiction.