Strategic cost management
Tables 1 and 2 below show the company's production budget. To help determine the profit of each individual product, the CFO wants overheads to be allocated back to the products. Total inspection costs are $40,000.
Table 1:
Units 20 Units
Direct Labor Hours per Unit 200 Hours per Unit
Number of Inspections 5 per Unit
Table 2:
Units 20 Units
Direct Labor Hours per Unit 200 Hours per Unit
Number of Inspections 15 per Unit
1. Under a costing system that uses direct labor hours as a driver for the allocation, how much of the inspection costs would be allocated to Table 1?
2. Repeat the same question using data contained in Table 2.
3. Using ABC and the number of inspections as a driver for allocation, recalculate the allocation for Table 1.
4. Repeat the activity mentioned in question 3 for Table 2.