[reloadedxp]

Can someone please explain why the answer is C?

28. CPA-08307

A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

a. Electricity expense.

b. Repair and maintenance expense.

c. Employee benefits expense.

d. Depreciation expense.

Solution:

Choice “c” is correct. Activity-based costing seeks to assign overhead costs in a manner that identifies consumption of resources. Employee salaries or even head count are more appropriate cost drivers than machine hours for employee benefits expense. Machine hours would be more likely identified as cost drivers for electric, repairs and maintenance, and depreciation expense.

Choice “a” is incorrect. Machine hours are likely an appropriate cost driver for electricity expense.

Choice “b” is incorrect. Machine hours are likely an appropriate cost driver for repairs and maintenance expense.

Choice “d” is incorrect. Machine hours are likely an appropriate cost driver for depreciation expense.

[iwantmylifeback_]

You have to think about it in terms of what would be different under a traditional vs activity based cost system.

Machine hours are used to allocate electricity, repairs, and depreciation under a traditional system. If you were to think of a cost driver to be used that could predict those costs, machine hours would also work under an activity-based costing system.

Employee benefit expense and machine hours are unrelated. Therefore, switching to an ABC system you'd have to find a new cost driver that has a correlation to employee benefit expense.

Does that make sense?

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[reloadedxp]

iwantmylifeback, thanks so much…it makes more sense now!

[iwantmylifeback_]

Glad I could help!

BEC 85
AUD 99
REG 88
FAR 93

[Author]

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