Star Manufacturing, Contemplating the Adoption of an Activity-Based Costing System

Essay

Star Manufacturing, contemplating the adoption of an activity-based costing system, has established three activity-cost pools: machine setup, quality assurance, and engineering. These cost pools, the appropriate cost driver, and the percentage of each cost driver consumed by the company's products (H15, H16, and H17) follow:
$\begin{array}{l}\begin{array}{lll}\underline { \text { Cost Pool } }&\underline { \text { Cost Driver } }\\\text { Machine setup } & \text { Number of setups } \\\text { Quatity } & \text { Number of inspections } \\\text { assurance }\\\text { Engineering } & \text { Number of change } \\& \text { orders }\end{array}\begin{array}{lll}\underline{ \text { H15}}& \underline{ \text { H16}}& \underline{ \text { H17}}& \\50 \% & 20 \% & 30 \% \\70 \% & 15 \% & 15 \% \\\\15 \% & 10 \% & 75 \%\\\\\end{array}\end{array}$

Estimated costs for these three activities, which account for 80% of the firm's total overhead, are $400,000, $500,000, and $120,000, respectively. Star currently applies manufacturing overhead to products on the basis of machine hours.
Required:
A. Will activity-based costing systems require more or fewer cost pools than traditional costing systems? No explanation is necessary.
B. Calculate the cost of machine setup, quality assurance, and engineering to be charged to products H15, H16, and H17 respectively.
C. Consider the company's current overhead application procedure.
1. Is Star emphasizing unit-level activities, batch-level activities, product-sustaining activities, or facility-level activities? Explain.
2. How accurate will the current costing procedure be given the nature of most of the company's activities? Briefly discuss.
3. How accurate will the current costing procedure be given the consumption ratios of the firm? Briefly discuss.