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11. The Inground Sprinkler Supply sells sprinkler systems suited for large or small yards. The company has decided to adopt an activity-based costing system. Last year the company incurred $1,000,000 in overhead costs related to the following activities:
Activity Allocation Base Overhead Cost
Purchasing number of purchase orders $ 350,000Material handling number of shipments received 200,000
Quality inspection number of inspections 450,000
The activities for large and small yard systems were as follows:
Large Small
purchase orders 15,000 20,000
shipments received 7,500 12,500
inspections 11,500 11,000If a customer requested a bid on a specially designed sprinkler that would probably require four inspections, how much quality inspection overhead would you include in the bid?
a. $ 0
b. $40
c. $80
d. $120.
e. $160.The answer sheet states (c) $80 as the answer.
Can you please explain?
The total cost of inspections is $450,000.
The total number of inspections is 11,500 + 11,000 = 22,500
Therefore the cost per inspection is $450,000/22,500 = $20.
The sprinkler requires 4 inspections, so 4 at $20 = $80.
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