Muffin Manufacturing is considering the implementation of activity based costing and has established three activity cost pools:
Question:
Muffin Manufacturing is considering the implementation of activity based costing and has established three activity cost pools: machine setups, quality assurance, and engineering. The percentage of each cost driver consumed by the company’s 3 products (G1, G2, and G3) is included in the following table.
Cost Pool Cost Driver G1 G2 G3
Machine setups Number of setups 50% 30% 20%
Quality assurance Number of inspections 70% 15% 15%
Engineering Number of change orders 20% 10% 70%
Estimated costs for these three activities, which account for 75% for the firm’s total overhead are $300,000, $500,000, and $100,000, respectively. Muffin currently applies manufacturing overhead to products based on the basis of machine hours.
Required:
- Compute the cost of machine setups, quality assurance, and engineering to be charged to product G2.
- Determine the level (unit, batch, etc.) of each cost pool’s activity.
- Under the current method of overhead application, what level of activity is emphasized?
- Will ABC provide better cost information for this company? Explain.