Question

One of Anfa Company's activity cost pools is inspecting, with an estimated overhead (OH) of $100,000. It produces throw rugs (700 inspections) and area 'rugs (1,300 inspections). How much $$ OH should be assigned to throw rugs inspections?

A) $35,000
B) $50,000
C) $53,846
D) $100,000

Answer 1

The overhead cost assigned to throw rugs inspections by Anfa Company is $35,000, calculated using activity-based costing. This demonstrates the concept of 'spreading the overhead,' where a fixed cost is allocated over an increasing number of units, decreasing the average cost per unit.

Step-by-step explanation:

The student is asking about the allocation of overhead costs to products based on the activity of inspecting in a company. To calculate the amount of overhead to assign to the throw rugs inspections, we use activity-based costing. The total overhead of $100,000 must be allocated to the products based on the number of inspections. Since there are 2,000 inspections in total (700 for throw rugs and 1,300 for area rugs), we determine the cost per inspection by dividing $100,000 by 2,000, which results in $50 per inspection. Multiplying the cost per inspection by the number of inspections for throw rugs, we get 700 inspections x $50 = $35,000. Therefore, the overhead assigned to throw rug inspections is $35,000 (Option A).

To understand how overhead is spread, consider a fixed cost or overhead of $1,000. As production increases, this cost is divided among more units, resulting in a decrease in average fixed cost per unit. The average fixed cost curve would be downward sloping, illustrating the concept of "spreading the overhead" as production volume increases and the fixed cost is distributed over a larger number of units, reducing the cost per unit.