Question

1. Westmorland makes ink that it uses in ball point pens. The Company produces two colors of ink. One is blue; the other is red. Ink is made in batches with setup costs being $2,000 per batch. Demand for blue ink is significantly stronger than for red ink. During the most recent week, the company made 2 batches of ink, one blue the other red. It requires 1 hour of labor to make a gallon of ink regardless of color. There were 300 hours of labor used to make the blue ink and the 100 hours of labor used to make the red ink. Under these circumstances:_______.

a. more of the total setup cost should be assigned to the red ink than to the blue ink.
b. more of the total setup cost should be assigned to the blue ink than to the red ink.
c. the total setup cost should be allocated equally between the red and blue ink.
d. one of the answers is correct.
If the Company uses a single company wide overhead rate based on labor hours, the amount of setup cost allocated to the:_______.
a. blue ink is $4,000 and red ink is zero.
b. blue ink is $1,000 and red ink is $3,000
c. blue ink is $3,000 and red ink is $1,000.
d. blue ink is $2,000 and red ink is $2,000.
2. Which of the following is an activity-based cost driver?
A. Number of machine setups
B. Machine hours
C. Material cost
D. All of these answers are correct.
3. What is the principal reason that direct labor hours is no longer an effective base for allocating indirect costs in many modern manufacturing companies?
A. Movement from full-time to part-time workers
B. Automation
C. Workers are not as productive as they were in the past

Answer 1

1) c. the total setup cost should be allocated equally between the red and blue ink.

Setup costs depend on the number of production batches, since one production batch was made for each color of ink, then the costs should be allocated equally.

2. Which of the following is an activity-based cost driver?

A. Number of machine setups

Other examples include production orders, quality inspections, maintenance orders, etc.

3. What is the principal reason that direct labor hours is no longer an effective base for allocating indirect costs in many modern manufacturing companies?

B. Automation

The main reason why so many manufacturing jobs have been lost in recent years is not because of China or Mexico (or other countries with cheap labor), it is automation. Most modern companies are replacing workers with robots.

Step-by-step explanation:

setup costs $2,000 per batch

one red and one blue

Demand for blue ink is significantly stronger than for red ink

1 hour of labor per gallon of ink

300 gallons of blue produced

100 gallons of red produced