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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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The receiving department employs one worker who spends 25% of his time on the receiving activity and 75% of his time on inspecting products. His salary is $40,000. The amount of cost assigned to the receiving activity is

  1. a. $34,000.
  2. b. $40,000.
  3. c. $10,000.
  4. d. $30,000.
  5. e. None of these.

To determine

Identify the amount of cost allocated to the receiving activity.

Explanation

ABC Costing:

In activity based costing overhead costs are allocated to various departments based on the respective cost driver. ABC costing provides a more accurate allocation than using a threshold rate. For example, using labor hours for allocating ordering costs would not be appropriate, rather number of orders should be used to allocate the cost.

c.

In activity based costing, overhead costs are allocated on the basis of specific cost drivers. Overhead costs are allocated on the basis of consumption of such overhead within various departments.

Computation of amount of salary to be allocated to receiving activity:

Allocation can be made by using the following formula:

Allocation=Totalsalary×Timeusedinthereceivingactivity

Substitute $40,000 for total salary and 25% for the time used in the receiving activity in the above formula

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