Milan pasta produres spaghetti & fettuccine on same machine with different setti
ID: 2434477 • Letter: M
Question
Milan pasta produres spaghetti & fettuccine on same machine with different setting and slightly different raw materials. The fettuccine requires more inspection time. total daily cost of inspection is $500. Here are daily production data for the two products: Spaghetti FettuccinePounds produced 6,000 2,000
Machine minutes per pound 0.20 0.40
Inspection hours per product line 8 24
Required:
(a)Calulate the inspection cost per pound of pasta using traditional absorption costing with number of machine hours as the allocation base. (b) Calulate the inspection cost per pound of pasta using activity-base costing. Assume inspection time is cost driver. (c) Analyze why inspection costs differ between the methods used in (a) and (b).
Explanation / Answer
.Calculation of inspection costper pound under absorbtion costing Data given Spaghetti Fettuccine Total inspection cost 500.00 machine hoursper pound 0.20 0.40 Basis for absorbtion is machine hours Divide the total inspection cost in the ratio of machine hours, as 2:4 Sphaghetti = 500×2/6 166.67 Fettuccine= 500×4/6 333.33 b.Calculation of inspection cost perpound under activity base costing Total inspection cost 500.00 Inspection hours per product line 8.00 24.00 Devide the total inspection cost in the ratio of inspection hours , as 8:24 i.e. as 1:3 sphaghetti=500×1/4 125.00 Fettuccine=500×3/4 375.00 c. The inspection costs differ between the two methods because 1.in the first method machine hours are taken as basis , and 2.In the second method inspection hours taken as basis.