201-Wk3-Solution to end prob-S'12

# 201-Wk3-Solution to end prob-S'12 - III Additional problems...

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Product costing – page 43 III. Additional problems A. MILAN PASTA (adapted from Zimmerman, 2 nd ed. P11-4, Exam I, S’99) At its Lyle Avenue plant, Milan Pasta produces two types of pasta: spaghetti and fettuccine. The two pastas are produced on the same machines, with different settings and slightly different raw materials. Management is concerned with the allocation of inspection costs to the two types of pasta. Traditionally, inspection costs have been allocated using the number of machine hours as the allocation base. The controller thinks the inspection costs allocated to the fettuccine are too small since fettuccine takes a lot of inspection time. Fettuccine is a wider noodle and more susceptible to curling edges resulting in more total inspection time. The controller thinks it would be better to allocate the inspection costs using inspection time as the cost driver. The total daily cost of inspection is \$500. Daily production data for the two products is as follows: Spaghetti Fettuccine Pounds produced 4,000 lbs. 2,000 lbs. Machine minutes per pound 0.10 minutes/lb. 0.80 minutes/lb. Inspection hours per product line 8 hours 12 hours Product costing – page 44 A1. Calculate the inspection cost per pound of fettuccine using the traditional allocation base of machine hours (or minutes in this case). \$0.20/lb. OH rate = \$500 0.1 min./lb. x 4,000 lb. + 0.8 min./lb. x 2,000 lb. = \$0.25/min \$0.25/min. x .8 min./lb. = \$0.20/lb. A2. Calculate the inspection cost per pound of fettuccine using inspection time as the cost driver. \$0.15/lb. OH rate = \$500 8 Inspection hours + 12 Inspection hours = \$25/Inspection hour \$25/Inspection hour x 12 Inspection hours 2,000 lbs. = \$0.15/lb.

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Product costing – page 45 A. MILAN PASTA (CONT.) A3. Analyze why inspection costs differ between the two methods (parts A1 and A2 above). Explain why the overhead costs increased or decreased when the allocation base changed from machine time to inspection time. Be as specific as possible and use as many numbers as possible to clarify and support your argument. Percentage of base consumed by each product – MILAN PASTA
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201-Wk3-Solution to end prob-S'12 - III Additional problems...

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