2-7 What is meant by an activity base when dealing with variable costs? Give several exam- ples of activity bases.
Related questions
Teldar Manufacturing Company is a diversified manufacturer thatmanufactures three products (M5, Z4, and I8) in a continuousproduction process. Senior management has asked the controller toconduct an activity-based costing study. The controller identifiedthe amount of factory overhead required by the critical activitiesof the organization as follows:
1 | Activity | Activity Cost Pool |
2 | Production | $251,598.00 |
3 | Setup | 92,035.00 |
4 | Material handling | 10,736.00 |
5 | Inspection | 49,833.00 |
6 | Product engineering | 136,230.00 |
7 | Total | $540,432.00 |
The activity bases identified for each activity are asfollows:
| Activity | ActivityBase |
|---|---|
| Production | Machine hours |
| Setup | Number of setups |
| Material handling | Number of parts |
| Inspection | Number of inspection hours |
| Product engineering | Number of engineering hours |
The activity-base usage quantities and units produced for thethree products were determined from corporate records and are asfollows:
| Machine | Number of | Number of | Number of | Number of | ||
| Hours | Setups | Parts | Inspection Hours | Engineering Hours | Units | |
| M5 | 970 | 63 | 84 | 489 | 123 | 1,354 |
| Z4 | 802 | 123 | 138 | 272 | 170 | 1,044 |
| I8 | 435 | 209 | 266 | 256 | 185 | 452 |
| Total | 2,207 | 395 | 488 | 1,017 | 478 | 2,850 |
Each product requires 0.72 machine hour per unit.
| Required: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Complete the Activity Tablesfor M5, Z4 and I8.
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| Required: | |||||||
Complete the Activity Table forZ4.
|
| Z4 | |||||
| Activity | Activity- | ||||
| Base | Activity | Activity | |||
| Usage | X | Rate | = | Cost | |
| Production | |||||
| Setup | |||||
| Material handling | |||||
| Inspection | |||||
| Engineering | |||||
| Total activity cost | |||||
| ÷ Number of units | ÷ | ||||
| Activity cost per unit | |||||
| Required: | |||||||
Complete the Activity Table forI8.
|
| I8 | |||||
| Activity | Activity- | ||||
| Base | Activity | Activity | |||
| Usage | X | Rate | = | Cost | |
| Production | |||||
| Setup | |||||
| Material handling | |||||
| Inspection | |||||
| Engineering | |||||
| Total activity cost | |||||
| ÷ Number of units | ÷ | ||||
| Activity cost per unit | |||||
Teldar Manufacturing Company is a diversified manufacturer thatmanufactures three products (M5, Z4, and I8) in a continuousproduction process. Senior management has asked the controller toconduct an activity-based costing study. The controller identifiedthe amount of factory overhead required by the critical activitiesof the organization as follows:
1 | Activity | Activity Cost Pool |
2 | Production | $264,000.00 |
3 | Setup | 96,000.00 |
4 | Material handling | 9,600.00 |
5 | Inspection | 50,000.00 |
6 | Product engineering | 150,000.00 |
7 | Total | $569,600.00 |
The activity bases identified for each activity are asfollows:
Activity | Activity Base |
|---|---|
| Production | Machine hours |
| Setup | Number of setups |
| Material handling | Number of parts |
| Inspection | Number of inspectionhours |
| Product engineering | Number of engineeringhours |
The activity-base usage quantities and units produced for thethree products were determined from corporate records and are asfollows:
| Machine | Number of | Number of | Number of | Number of | ||
| Hours | Setups | Parts | Inspection Hours | Engineering Hours | Units | |
| M5 | 1,000 | 60 | 80 | 450 | 125 | 1,250 |
| Z4 | 800 | 120 | 150 | 300 | 175 | 1,000 |
| I8 | 400 | 220 | 250 | 250 | 200 | 500 |
| Total | 2,200 | 400 | 480 | 1,000 | 500 | 2,750 |
Each product requires 0.8 machine hour per unit.
| Required: | |||||||
Complete the Activity Tablesfor M5, Z4 and I8.
|
| Required: | ||||||||||||||||||||||||||||||
Complete the Activity Tablefor M5.
| ||||||||||||||||||||||||||||||
Adirondack Corporation is estimating activity costs associatedwith producing two different sized e-reader tablets. The indirectlabor can be traced to three separate activity pools. The budgetedactivity cost and activity base information, along with theestimated activity-base information, is provided below.
ActivityCost Activity Base
Purchasing $250,000 Number of purchase orders
Materials handling $500,000 Number of moves
Production 1,350,000 Machinehours
TOTAL $2,100,000
Number of Purchase Orders; Number of Moves; Machine Hours;Number of Units
7â tablet 3,000 1,500 2,500 2,500
10" tablet 5,000 600 7,500 3,500
TOTALS 8,000 2,100 10,000 6,000
Required: Determine the Activity rate for eachactivity cost pool. All work must be shown for credit.
Please label your answer as the activity rate for: Purchasing;Materials handling; & Production.
Activity | Activity Cost | Activity Base | Activity Base Total | Activity Cost / Total Activity Base |
Purchasing | $250000 | Number of Purchase Orders | 8000 | 250000/8000=31.25 |
Material Handling | $500,000 | Number of Moves | 2100 | 500000/2100=238.09 |
Production | $1350000 | Machine Hours | 10000 | $1350000/10000=135 |
Using the information from the activity rate you calculated, usethe following chart (as a guide- you do not need to replicate thetemplate) to determine the activity cost pertablet:
All work must be shown for credit.
A | B | C | D | E | F | G | |
1 | 7 inch tablet | 10 inch tablet | |||||
2 | Activity | Activity-Base Usage à | Activity Rate | Activity = Cost | Activity- Base Usage à | Activity Rate | Activity = Cost |
3 | Purchasing | ||||||
4 |
| ||||||
5 | ] | ||||||
6 | |||||||
7 | |||||||
8 | Activity cost per tablet | ||||||
Using the information from the activity based costingproblem:
If traditional costing had been used and number of machine hourswere the allocation base, what would the single allocation rate be?Would applying a single allocation rate be a wise decision to applycosts in this scenario? Why or why not?
