Question

Lynwood, Inc. produces two different products (Product A and Product X) using two different activities Machining, which uses machine hours as an activity driver and Inspection, which uses number of batches as an activity driver. The activity rate for Machining is $10 per machine hour, and the activity rate for inspection is $500 per batch. The activity drivers are used as follows: Total Machine hours Number of batches Product Product X 1,100 3,500 53 21 74 What is the amount of Machining cost assigned to Product ? Murple Choice $490.000 $550.000 $26 500 $154,000

Answer 1

The correct answer is (A) - $ 490,000

Activity Based Costing is an accounting methodlology that assigns costs to the activity. Activity based costing is a method for assigning costs to products, services, tasks, based on activities that go into them and resources consumed by these activities.

where Activity refers to an event that incurs costs. (Machining)

Cost Object refers to an item for which cost is measured (Product X)

Cost Driver/Activity Driver is a factor that causes change in the cost of an activity (Machine Hours)

In the above question, Machining is an activity, Product X is the cost object and Machine Hours is the cost driver.

Therefore the amount of maching cost that can be assigned to Product X = Machine Hours used to manfacture Prodcut X * Rate per unit for Machining.

= 3,500 products * $140 per machine Hour

= $ 490,000