Question

A company manufactures diamond earrings and pendants. The company uses activity-based budgeting and has established diamond inspection as one of its cost pools with number of diamonds used as its cost driver. Inspection supplies for each diamond inspected are $0.35. For the upcoming year, the company originally believed it would produce and sell 10,000 pendants containing one diamond and 5,000 sets of earrings containing two diamonds, resulting in the following inspection cost per diamond. If the company now believes it will only be able to produce and sell 8,000 pendants (in addition to the earrings), the inspection cost per set of earrings would be

Answer 1

Inspection cost per set of earrings = $0.70

Step-by-step explanation:

Provided inspection cost is $0.35 per diamond.

In case of pendants = $0.35 for each as there is only one diamond.

In case of earrings there are two diamonds in each pair, thus cost driving rate = $0.35
`*` 2 = $0.70 for each pair.

Thus, the cost driver is based on capacity of 10,000 pendants and 5,000 pair of earrings.

Here, even the number of pendant sets have been reduced , but the cost driver rate will be same.

Total inspection cost of earrings = $0.70
`*` $5,000 = $3,500

Thus, for every pair of earrings the rate is $0.70