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Chapter 17: Q2E (page 790)

Refer to the information in Exercise 17-1. Compute the activity rate for each activity, assuming the company uses activity-based costing.
Activity
Expected Costs
Expected Activity
Handling materials
$625,000
100,000 parts
Inspecting product
900,000
1,500 batches
Processing purchase orders
105,000
700 orders
Paying suppliers
175,000
500 invoices
Insuring the factory
300,000
40,000 square feet
Designing packaging
75,000
2 models

Short Answer

Expert verified

Activity	Activity rate
Handling materials	$6.25
Inspecting product	600.00
Processing purchase orders	150.00
Paying suppliers	350.00
Insuring the factory	7.5
Designing packaging	37,500

Step by step solution

01

Meaning of Activity-based costing (ABC)

ABC is segmenting overhead usage based on the activity driver. These activities driver are machine hours, number of inspection, number of order etc.

02

Computing activity rate.

Activity	Expected Costs A	Expected Activity B	Activity rate A/B
Handling materials	$625,000	100,000 parts	$6.25
Inspecting product	900,000	1,500 batches	600.00
Processing purchase orders	105,000	700 orders	150.00
Paying suppliers	175,000	500 invoices	350.00
Insuring the factory	300,000	40,000 square feet	7.5
Designing packaging	75,000	2 models	37,500

Note: Following formula is used to find the activity rate

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Most popular questions from this chapter

Sara’s Salsa Company produces its condiments in two types: Extra Fine for restaurant customers and Family Style for home use. Salsa is prepared in department 1 and packaged in department 2. The activities, overhead costs, and drivers associated with these two manufacturing processes and the company’s production support activities follow.

Process Activity Overhead Cost Driver Quantity

Department 1 Mixing \( 4,500 Machine hours 1,500

Cooking 11,250 Machine hours 1,500

Product testing 112,500 Batches 600

\)128,250

Department 2 Machine calibration \(250,000 Production runs 400

Labeling 12,000 Cases of output 120,000

Defects 6,000 Cases of output 120,000

\)268,000

Support Recipe formulation \( 90,000 Focus groups 45

Heat, lights, and water 27,000 Machine hours 1,500

Materials handling 65,000 Container types 8

\)182,000

Additional production information about its two product lines follows.

Extra Fine Family Style

Units produced ……………………… 20,000 cases 100,000 cases

Batches ………………………………. 200 batches 400 batches

Machine hours ……………………… 500 MH 1,000 MH

Focus groups ………………………. 30 groups 15 groups

Container types ……………………. 5 containers 3 containers

Production runs …………………… 200 runs 200 runs

Required

1. Using a plantwide overhead rate based on cases, compute the overhead cost that is assigned to each case of Extra Fine Salsa and each case of Family Style Salsa.

2. Using the plantwide overhead rate, determine the total cost per case for the two products if the direct materials and direct labor cost is \(6 per case of Extra Fine and \)5 per case of Family Style.

3. If the market price of Extra Fine Salsa is \(18 per case and the market price of Family Style Salsa is \)9 per case, determine the gross profit per case for each product. What might management conclude about each product line?

4. Using ABC, compute the total cost per case for each product type if the direct labor and direct materials cost is \(6 per case of Extra Fine and \)5 per case of Family Style.

5. If the market price is \(18 per case of Extra Fine and \)9 per case of Family Style, determine the gross profit per case for each product. How should management interpret the market prices given your computations?

6. Would your pricing analysis be improved if the company used departmental rates based on machine hours in department 1 and number of cases in department 2 instead of ABC? Explain.

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

In conducting interviews and observing factory operations to implement an activity-based costing system, you determine that several activities are unnecessary or redundant. For example, warehouse personnel were inspecting purchased components as they were received at the loading dock. Later that day, the components were inspected again on the shop floor before being installed in the final product. Both of these activities caused costs to be incurred but were not adding value to the product. If you include this observation in your report, one or more employees who perform inspections will likely lose their jobs.

Required

1. As a plant employee, what is your responsibility to report your findings to superiors?

2. Should you attempt to determine if the redundancy is justified? Explain.

3. What is your responsibility to the employees whose jobs will likely be lost because of your report?

4. What facts should you consider before making your decision to report or not?

Glassworks Inc. produces two types of glass shelving, rounded edge and squared edge, on the same production line. For the current period, the company reports the following data.

Rounded Edge Squared Edge Total

Direct materials …………… \(19,000 \) 43,200 \( 62,200

Direct labor ………………… 12,200 23,800 36,000

Overhead 36,600 71,400 108,000

(300% of direct labor cost)

Total cost ………………….. \) 67,800 \( 138,400 \) 206,200

Quantity produced ……….. 10,500 ft. 14,100 ft.

Average cost per ft. (rounded) \( 6.46 \) 9.82

Glassworks'controller wishes to apply activity-based costing (ABC) to allocate the \(108,000 of overhead costs incurred by the two product lines to see whether cost per foot would change markedly from that reported above. She has collected the following information.

Overhead Cost Category (Activity Cost Pool) Cost

Supervision ……………………………………………………………….. \) 5,400

Depreciation of machinery ……………………………………………… 56,600

Assembly line preparation ……………………………………………… 46,000

Total overhead ……………………………………………………………. \(108,000

She has also collected the following information about the cost drivers for each category (cost pool) and the amount of each driver used by the two product lines.

Overhead Cost Category Usage

(Activity Cost Pool) Driver Rounded Edge Squared Edge Total

Supervision …………. Direct labor \)12,200 \(23,800 \)36,000

cost ($)

Depreciation Machine hours 500 hours 1,500 hours 2,000 hours

of machinery

Assembly Setups (number) 40 times 210 times 250 times

line preparation

Required

1. Assign these three overhead cost pools to each of the two products using ABC.

2. Determine average cost per foot for each of the two products using ABC.

3. Compare the average cost per foot under ABC with the average cost per foot under the current method for each product. Explain why a difference between the two cost allocation methods exists.

1. If management wants the most accurate product cost, which of the following costing methods should be used?

Volume-based costing using departmental overhead rates
Volume-based costing using a plantwide overhead rate
Normal costing using a plantwide overhead rate
Activity-based costing

2. Which costing method tends to overstate the cost of high-volume products?

Traditional volume-based costing
Activity-based costing
Job order costing
Differential costing

3. Disadvantages of activity-based costing include

It is not acceptable under GAAP for external reporting management
It can be costly to implement.
It can be used activity-based.
Both a. and b.

See all solutions

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