Question

A company uses activity-based costing to determine the costs of its three products: A, B, and C. The budgeted cost and cost driver activity for each of the company’s three activity cost pools follow. Compute the activity rates for each of the company’s three activities.

Budgeted Activity of Cost Driver
Activity Cost Pools	Budgeted Cost	Product A	Product B	Product C
Activity 1	\(140,000	20,000	9,000	6,000
Activity 2	\)90,000	8,000	15,000	7,000
Activity 3	$82,000	1,625	1,000	2,500

Short answer

Activity 1	4	Square feet
Activity 2	3	Units Inspected
Activity 3	16	Setups

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Activity-based costing

ABC is partitioning overhead utilization for merchandise and organization such as machine set up cost, salary of supervisor of production floor, etc.

Computing activity rates.

A			B			C	Activity rate A/C
	Budgeted cost	Activity cost driver	Product A	Product B	Product C	Total of Activity Cost driver
Activity 1	$140,000	Square feet	20,000	9,000	6,000	35,000	4
Activity 2	$90,000	Units Inspected	8,000	15,000	7,000	30,000	3
Activity 3	$82,000	Setups	1,625	1,000	2,500	5,125	16

Note: The activity rate formula is:

$\text{Activity}\text{rate}=\frac{\text{Budgeted}\text{cost}}{\text{Budgeted}\text{activity}\text{drivers}}$