This is a comprehensive problem comparing absorption costing and ABC. It is suggested that as you progress through the problem, keep track of the correct solutions, because these values will be used again later in the problem set.

Dehli Inkstone specializes in inkstone creation. Each finished inkstone needs 1 pounds of special materials which cost $20 a pound. (One pound contains 16 ounces.) Drilling requires 1 direct labor hour for which workers are paid $10 per hour, and 40 minutes of machine time. The preliminary product (a basic') is inspected to ensure that it is sound. Fifteen percent of the basics are rejected. It is not possible to rework these, and they have no salvage value. Each approved stone is handed to a master craftsperson who spends two hours making a Standard' product or three hours creating a Masterpiece'. Standards use half an hour of machine time and Masterpieces one hour. Finished inkstones are inspected again before packing. Four percent of finished products fail the final quality control assessment and are destroyed. Crafts persons are paid $18 per hour. It takes a basic' worker six minutes to package each inkstone in bubble wrap and a shipping carton, which cost 50 cents in materials and weigh 6 ounces in total.

Total overheads are estimated to be $587,400 per year and 97,900 direct labor hours are budgeted. Production plans for the year call for 60% of output to be Standard inkstones and the balance Masterpieces.

1) Which is the full (absorption) cost of a Masterpiece inkstone, if direct labor dollars are used as the cost driver? (Round overhead absorption rate to 3 decimal places).

A. $131.01

B. $134.15

C. $121.11

D. $127.87

E. None of the choices are correct

2) Which is the full (absorption) cost of a Masterpiece inkstone, if direct labor hours are used as the cost driver? (Allow a little for rounding errors).

A. $133.46

B. $106.47

C. $102.55

D. $96.10

E. None of the choices are correct

3) For a Masterpiece inkstone, which is true of the direct labor hours (DLH) needed (to 3 decimal places)?

A. Total DLH are 4.100

B. Total DLH are 4.401

C. Total DLH are 4.406

D. Total DLH are 4.450

E. None of the choices are correct

4) Which is the full (absorption) cost of a Standard inkstone, if machine hours are used as the cost driver? (Allow a little for rounding errors).

A. $94.81

B. $101.89

C. $107.25

D. $107.88

E. None of the choices are correct

5) For a Standard inkstone, which is true of the machine hours (MH) needed (to 3 decimal places)?

A. Total MH are 1.188

B. Total MH are 1.305

C. Total MH are 1.338

D. Total MH are 1.397

E. None of the choices are correct

6) For a Standard inkstone, which is true of the materials input needed (to 3 significant figures)?

A. Total weight is 2.279 pounds

B. Total weight is 2.213 pounds

C. Total weight is 2.140 pounds

D. Total weight is 1.875 pounds

E. None of the choices are correct