Norton Chemical Company produces two products: Amithol and Bitrite. The company uses activity-based costing (ABC) to allocate manufacturing overhead to these products. The costs incurred by Norton’s Purchasing Department average $80,000 per year and constitute a major portion of the company’s total manufacturing overhead.
Purchasing Department costs are assigned to two activity cost pools: (1) the order cost pool and (2) the inspection cost pool. Costs are assigned to the pools based on the number of employees engaged in each activity. Of the department’s five full-time employees, one is responsible for ordering raw materials, and four are responsible for inspecting incoming shipments of materials.
Costs assigned to the order pool are allocated to products based on the total number of purchase orders generated by each product line. Costs assigned to the inspection pool are allocated to products based on the number of inspections related to each product line.
For the upcoming year. Norton estimates the following activity levels:
| Total | Amithol | Bitlrite |
Purchase orders generated | 10,000 | 2,000 | 8,000 |
Inspections conducted | 2,400 | 1,800 | 600 |
In a normal year, the company conducts 2.400 inspections to sample the quality of raw materials. The large number of Amithol-related inspections is due to quality problems experienced in the past. The quality of Bitrite materials has been consistently good.
Instructions
a. Assign the Purchasing Department’s costs to the individual cost pools.
b. Allocate the order cost pool to the individual product lines.
c. Allocate the inspection cost pool to the individual product lines.
d. Suggest how Norton might reduce manufacturing costs incurred by the Purchasing Department.
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