BA510 Accounting for Decision Making: P11-4 Milan Pasta produces spaghetti & fettuccine

BA510 Accounting for Decision Making

P11-4
Milan Pasta produces 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 Fettuccine
Pounds produced 6,000 2,000

Machine minutes per pound 0.20 0.40
Inspection hours per product line 8.00 24.00

Required:
(a)Calculate the inspection cost per pound of pasta using traditional absorption costing with number of machine hours as the allocation base.
(b) Calculate the inspection cost per pound of pasta using activity-based costing. Assume inspection time is cost driver.
(c) Analyze why inspection costs differ between the methods used in (a) and (b).
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