Problem:
Parsons Corp. manufactures a variety of products. In the past, Parsons had been using a traditional overhead allocation system based on direct labor hours. For the current year, Parsons decided to switch to an activity-based costing system using direct labor hours and the number of inspections as measures of activity. Information on these measures of activity and related overhead rates for the current year are as follows:
Cost Estimated Manufacturing
Driver Activity Overhead
Direct labor hours................ 50,000 $400,000
Number or inspections............. 3,000 $120,000
$520,000
Job #B12 for the current year required 15 direct labor hours and 2 inspections. Would this job have been overcosted or undercosted under the traditional system and by how much?
A) Undercosted by $36.
B) Undercosted by $44.
C) Overcosted by $80.
D) Undercosted by $80.