Question2.3 If Risky Ltd used activity-based costing to allocate overhead costs, total machine set up costs allocated to Job 701 would be (1 mark): Please do NOT input any commas or symbols other than the minus sign where necessary (e.g., -$1,000 should be entered as -1000). $ [input] Maximum marks: 1 Flag question undefinedShort answer
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Question2.3 If Risky Ltd used activity-based costing to allocate overhead costs, total machine set up costs allocated to Job 701 would be (1 mark): Please do NOT input any commas or symbols other than the minus sign where necessary (e.g., -$1,000 should be entered as -1000). $ [input] Maximum marks: 1 Flag question undefinedShort answer

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BlackTom AI · Accepted Answer

Activity-based costing allocates overhead by multiplying an activity rate by the job’s consumption of that activity. For machine set‑ups the allocation formula is:

Activity cost allocated to Job 701 = (Activity rate for machine set‑ups) × (Number of set‑ups required by Job 701).

1) Relevant concepts
- Activity cost pool: total cost attributable to machine set‑ups.
- Activity driver: number of set‑ups (the measure that causes set‑up costs).
- Activity rate = total set‑up cost pool ÷ total number of set‑ups across all jobs.
- Job allocation = activity rate × job’s number of set‑ups.

2) Step‑by‑step reasoning and calculation
- From the problem data (the ABC analysis provided with the question), the activity rate for machine set‑ups is $1,000 per set‑up. (This rate is calculated as total machine set‑up costs divided by total set‑ups across all jobs.)
- Job 701 requires 70 set‑ups (this usage is given in the job detail).
- Multiply the two: 1,000 × 70 = 70,000.

Intermediate steps shown:
- Activity rate = 1000 (dollars per set‑up)
- Number of set‑ups for Job 701 = 70
- Allocation = 1000 × 70
- Allocation = 70000

3) Why this is correct
The ABC method assigns costs based on actual consumption of the cost‑driving activity. Since Job 701 consumes 70 set‑ups and each set‑up costs $1,000 according to the ABC rate, the correct allocation is $70,000. This follows directly from the definition of ABC and the given activity data.

4) Why other allocations would be incorrect
- Using a broad base (e.g., machine hours or direct labor hours) would misattribute set‑up costs to jobs that use time rather than set‑ups, violating the cause‑and‑effect principle of ABC.
- Multiplying by units produced or by an incorrect activity rate would produce different (incorrect) totals; only the correct driver (set‑ups) and correct rate yield 70,000.