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Making Waves, Inc. manufactures two lines of bodyboards: Basic and Deluxe. Under the current costing system, manufacturing overhead is allocated to each product line based on direct labor hours. Each Basic bodyboard requires 4.0 direct labor hours to shape, and each Deluxe bodyboard requires 12.0 direct hours to shape. For the upcoming period, the company expects to manufacture 1,000 Basic bodyboards and 500 Deluxe bodyboards. In addition, the company estimates that its total manufacturing overhead for the upcoming period will be $130,000.

The controller for the company has suggested to management that an activity based costing system be analyzed to better understand what is driving manufacturing overhead costs. Before fully analyzing the impact of switching to ABC, management has asked the controller to focus on the quality inspection activity, which accounts for 75% of the total budgeted manufacturing overhead. After speaking with the production supervisor, the controller has determined that the most appropriate cost driver for quality inspection overhead costs is the total number of quality inspection hours logged. Inspections are performed for every 40 Basic bodyboards manufactured and every 10 Deluxe bodyboards manufactured. Quality inspectors spend 2 hours inspecting each batch.

Which of the following statements is incorrect?

A.

A total of 150 inspection hours are expected for the projected production level.

B.

The current costing system is undercosting Basic and overcosting Deluxe with respect to the quality inspection overhead.

C.

Under the current costing system, 40% of the overhead related to quality inspection is allocated to Basic.

D.

Under activity based costing, approximately 67% of the overhead related to quality inspection is allocated to the Deluxe

E.

The cost distortion per unit is higher for the Deluxe than it is for the Basic bodyboard line.

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