Exam 4: Activity-Based Costing Systems

The development of a recipe for a specific type of cereal by Kellogg Corporation is an example of a batch-level resource.

A medical equipment manufacturer produces two major products. One is a plastic disposable syringe with two parts per unit. The other is a high tech pump used for hospital procedures involving heart patients. The device has 250 parts. Both products require direct labor, which is split 50/50 between the two products. The company has identified various cost pools, including one that is material handling costs. The costs in this pool include wages and employee benefits of the workers receiving materials, inspecting materials, storing materials and moving materials to workstations, depreciation and maintenance of forklift trucks, and the cost of supplies and other related costs. Cost information related to the production process appears below: Required: a) Determine the total material handling cost and cost per unit that would be assigned to Syringes and Pumps if material handling costs are allocated based on direct labor hours. b) Determine the total material handling cost and cost per unit that would be assigned to Syringes and Pumps if material handling costs are allocated based on the number of parts using Activity-Based Costing ABC. c) Which method of cost allocation is more appropriate? Explain your answer.