Question

It's About Time, Inc., manufacturers 2 lines of cocks Digital and Analog Under the current costing system, manufacturing overhead is applied to each line based on machine hours Machine Setup costs account for the majority of manufacturing overhead and are expected to total $75,000 for the upcoming period. The controller for the company has suggested to management that an activity based costing system be analyzed and has determined that the number of machine setups drives the total machine setup costs. The following information was compiled for the analysis Analog 2.500 hours 500 clocks 10 clocks Digital Total Expected Machine Hours for Budgeted Output 1.500 hours Budgeted Output 750 clocks Number of Clocks to be Produced per Machine Setup 25 clocks Which of the following statements is correct with respect to machine setup costs? O A Ithe Digital product line is being overcosted with respect to machine setup costs, it is likely that the Analog product line is also being overcosted with respect to machine setup costs. OB. The current costing system is not over/undercosting the product lines with respect to machine setup costs O C. Since direct material and direct labor information are not given it is impossible to determine if the product lines are being over/undercosted O D. Under the current costing system 60% of the machine setup manufacturing overhead costs are applied to the Digital product line O E. Under the activity based costing system. 37.5% of the machine setup manufacuring overhead costs are ablied to the Analog product line. Click to select your answer

Answer 1

		0.375	0.625
				4000
				0.6
	Correct Option is B.	Since, allocation ratio in same ie.e 37.5% for digital and analog.
		Digital	Analog	Digital	Analog
	Total expected machine hours	1500	2500	0.375	0.625
	Budgeted Output	750	500
	Number of clock to be Produced per machine setup	25	10
	Total setup required	30	50	0.375	0.625
				Ratio
	Reasons for other options for being incorrect:
	Option A	If there are two products only in the company and overheads are allocated and if there is overcosting in one product then other costing MUST BE UNDERCOSTED not overcosted.
	Option C	Direct material and direct labor information is not relevant for determining overcosting and undercosting. Machine Hours and overhead expense are required only.
	Option D	Under current costing, out of total 4000 machine hours, 1500 hours are for digital which is 37.5% of total overhead hence, 60% is not correct.
	Option E	Under Activity based costing 62.5% overhead cost are applied to the analog product line.

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