Hello everyone,
I have a doubt on the below question. The solution says that "the fixed cost per unit will increase, as that cost will now be spread over a smaller number of cost driver units.The fixed cost per unit will increase, as that cost will now be spread over a smaller number of cost driver units"
The doubt that I have is how is that the fixed cost per unit will increase if the number of insertions parts is reduced.
Question:
SANSCOM Corporation utilizes an activity-based costing system for applying costs to its two products, P and Q. In the assembly department, material handling costs vary directly with the number of parts inserted into the product. Machinery is recalibrated and oiled each weekend regardless of the number of parts inserted during the previous week. Both material handling and machinery maintenance costs are charged to the product on the basis of the number of parts inserted. Due to reengineering of the production process for Product P, the number of insertion parts per finished unit has been reduced. How will the redesign of the production process for Product P affect the activity-based cost of Product Q?
| Material handling cost per Q unit will increase, and machinery maintenance cost per Q unit will remain unchanged. |
| Material handling cost per Q unit will increase, and machinery maintenance cost per Q unit will increase. |
| Material handling cost per Q unit will remain unchanged, and machinery maintenance cost per Q unit will remain unchanged. |
| Sol: | Material handling cost per Q unit will remain unchanged, and machinery maintenance cost per Q unit will increase. |
This Answer is Correct
Note that the production process for Product P was reengineered, not the production process of Product Q, which this question is asking about. Material handling costs are variable and machinery maintenance costs are fixed. Because the variable costs are being assigned by the cost driver, material handling cost per Q unit will remain unchanged. The fixed cost per unit will increase, as that cost will now be spread over a smaller number of cost driver units.
Regards,
Ritin Nair