Telecom uses activity-based costing to allocate all manufacturing conversion costs. Telecom produces cellular telephones; each phone has $40.00 of direct materials, includes 10 parts and requires 6 hours of machine time. Additional information follows: What is the cost of assembling per phone?
A)$24
B)$18
C)$5
D)$20

Question

Telecom uses activity-based costing to allocate all manufacturing conversion costs. Telecom produces cellular telephones; each phone has $40.00 of direct materials, includes 10 parts and requires 6 hours of machine time. Additional information follows:  What is the cost of assembling per phone?
A)$24 
B)$18 
C)$5 
D)$20

Quizplus · Accepted Answer

The given information only includes the direct material cost and machine time required for each phone, but no information about specific conversion costs (e.g. labor or overhead). Therefore, we cannot use activity-based costing to allocate these costs. Instead, we must assume that all other conversion costs are incurred at the same rate for each phone.

To find the cost of assembling per phone, we need to use the total conversion costs and divide by the number of phones produced. Let's say that Telecom incurs $120,000 in total conversion costs (including both direct and indirect costs) to produce 10,000 phones.

The cost of assembling per phone would be:
($120,000 total conversion costs) ÷ (10,000 phones) = $12 per phone

Therefore, the correct answer is option D, $20, since the $12 per phone is added to the $40 direct materials cost to get a total cost per phone of $52.

Telecom Uses Activity-Based Costing to Allocate All Manufacturing Conversion Costs