Question

Please answer only the Discussion Questions

Giant Bicycles (GB) produces 2 different grades of bikes.

1^st – is a Multi-Purpose Bike produced in highvolumes that uses relatively few components.

2^nd - is a Custom Bike, produced in lower volumes anduses more unique components.

Company strategy: Produce the multi-purpose bike in high volumesto effectively utilize capacity and the lower volume custom bike toearn higher profit margins.

	Multi-purpose Bike	Custom Bike	Total
Units Produced	10000	1000	11000
Direct Materials	$200/bike	$400/bike
Direct labor hours @ $20/hour	1.6 hours/bike	4.0 hours/bike

Part A

Assuming the company's cost accounting system allocates totaloverhead costs based on total direct labor hours: (a) Calculate anoverhead rate per direct labor hour. (b) Calculate the full unitcost per bike for the multi-purpose bike and custom bike,respectively.

Part B

Upon further inspection, a feature of the manufacturing processis the use of state-of-the-art fabrication equipment that enablesthe company to produce bike frames. GB’s manufacturing overheadis:

Frame Fabrication Overhead	$360,000
Bike Assembly Overhead	350,000
Total	$710,000

Assume the company's cost accounting system allocates framefabrication related overhead costs based on machine hours and bikeassembly overhead costs based on direct labor hours. The followingvolume mix and other data are relevant:

	Multi-purpose Bike	Custom Bike	Total
Units Produced	10000	1000	11000
Direct Materials	$200/bike	$400/bike
Direct labor hours @ $20/hour	1.6 hours/bike	4.0 hours/bike
Machine Hours	0.3 hours/bike	1.5 hours/bike

Assuming the company's cost accounting system allocates overheadcosts based on total machine hours for fabrication overhead andtotal direct labor hours for assembly overhead: (a) Calculateoverhead rates per direct labor hour and machine hour. (b)Calculate full unit cost per bike for the multi-purpose bike andcustom bike, respectively. Comment on the difference between partsA. and B.

Part C

Subsequent analysis suggested that additional data could be usedto "activity cost" the overhead allocation. The research shows thatfabrication set-up is a required activity to configure the machine,at the beginning of a production run for each particular type ofbike. It is also noted that component handling is an identifiableactivity within bike assembly. Therefore, GB’s manufacturingoverhead is now detailed as:

Frame Fabrication Overhead:
Fabrication Set-up	$150000
Fabrication	210000
Total Frame Fabrication Overhead	360000

Bike Assembly Overhead:
Component Handling	$75000
Assembly	275000
Total Bike Assembly Overhead	350000
Total	$710000

The new additional activity data by biketype:

Activity Pool

	Activity Volume
	Multi-Purpose Bike	Custom Bike	Total
Fabrication Set-ups	150	150	600
Components handled	120000	30000	150000

The remaining frame fabrication overhead costs not applicable toset-ups can be allocated, as before in Part B, using machine hours.Likewise, the bike assembly overhead costs not applicable tocomponent handling can be allocated, as before in Part B, directlabor hours.

Company's cost accounting system allocates overhead costs basedon total machine hours for fabrication overhead & total directlabor hours for assembly overhead:

a. Calculate the four activity overhead rates required fromabove.

b. Calculate full unit cost per bike for the multi-purpose bikeand custom bike, respectively.

DISCUSSION QUESTIONS

Discuss the following concepts concerning the company:

1. What are the mechanics and conceptual basis for activitybased product/service costing? and

2. How do they apply to the case? Including the Overhead CostBehavior and Activity.

3. How was Activity Costing utilized to determine product costsin this problem.