Question

Hale Company manufactures two models of its couch, the Mini and the Maxi. The Mini model requires 10,000 direct labor hours and the Maxi model requires 40,000 direct labor hours. The company produces 4,000 units of the Mini model and 1,000 units of the Maxi model each year. The company produces the Mini model in batch sizes of 200, while it produces the Maxi model in batch sizes of 100. The company expects to incur $360,000 of total setup costs this year. How much of the setup costs are allocated to the Mini model using ABC costing?a.$240,000b.$180,000c.$72,000d.$300,000

Answer 1

The answer is a. $240,000

Step-by-step explanation:

The set-up cost should be allocated based on the number of batches each model produced every year.

+ The number of Mini batches produced each year = Number of Mini units produced each year / Number of mini units produced in one batch = 4,000/ 200 = 20 batches;

+ The number of Maxi batches produced each year = Number of Maxi units produced each year / Number of Maxi units produced in one batch = 1,000/ 100 = 10 batches;

=> Total of batches produced each year = 20 + 10 = 30 batches.

=> Setup cost allocated to each batch produced = Total setup cost/ Total of batches produced = 360,000/30 = $12,000

=> Setup costs allocated to the Mini model = Setup cost allocated to each batch produced x Number of Mini batches produced each year = $12,000 x 20 = $240,000.

So, the answer is a.$240,000