ABC Example

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 companys 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 firms 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:

1. Compute the cost of machine setups, quality assurance, and engineering to be charged to product G2.
2. Determine the level (unit, batch, etc.) of each cost pools activity.
3. Under the current method of overhead application, what level of activity is emphasized?
4. Will ABC provide better cost information for this company? Explain.