Question

Alex, Inc. produces two different products, Product A and Product B. Alex uses a plant-wide volume-based costing system in which machine hours are the activity base (cost driver). Alex is considering switching to an ABC system by splitting its manufacturing overhead cost of $1,000,000 across three activities:

Design, Production, and Inspection. Under the plant-wide volume-based costing system, the predetermined overhead rate is $2.50/machine hour. Under the ABC system, the rate for each activity and usage of the activity drivers are as follows:

Activity Design Machining Inspection Activity Rate $600/design hour $1.25/machine hour $500/batch Actual Activity Usage Product A Product B 200 300 100,000 300,000 100 300

Which product is under-costed and which is over-costed under the plant- wide volume-based cost system compared to ABC?

a. Both Product A and Product B are under-costed

b. Both Product A and Product B are over-costed

c. Product A is over-costed and Product B is under-costed.

d. Product A is under-costed and Product B is over-costed.

Answer 1

d. Product A is under-costed and Product B is over-costed.

Step-by-step explanation:

Alex, Inc.

Given Data

Activity Activity Rate Actual Activity Usage

Product A Product B

Design $600/design hour 200 300

Machining $1.25/machine hour 100,000 300,000

Inspection $500/batch 100 300

Calculated

Activity Based Overheads

Activity Activity Rate Actual Activity Cost

Product A Product B

Design $600/design hour 120,000 180,000

Machining $1.25/machine hour 125,000 375,000

Inspection $500/batch 50,000 150,000

Total 295,000 705,000

Now Plant-wide Overhead Calculations

Product A = $2.50* 100,000 = $ 250,000

Product B = $2.50* 300,000 = $ 750,000

Comparing Both results Product A Product B

Plant wide OH $ 250,000 $ 750,000

ABC OH 295,000 705,000

Observation underscosted overcosted