ACC 406 Chapter 7: Chapter 7.docx

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16 Feb 2015

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Departmental rates: often produce average costs that over or understate individual product costs, two major factors impair their ability to assign overhead costs accurately, proportion of non unit related overhead costs to total overhead charge is large, degree of product diversity is great, unit level activities are activities that are performed each time a unit is produced, unit level activity drivers are factors that measure the consumption of unit level activities, non unit level activities are activities that are not performed each time a unit is produced, non unit level activity drivers are factors that measures, activity drivers are factors that measure the consumption of activities by products and other cost objects and can be classified as either unit level or non unit level, unit level(cid:224) varies with output volume (i. e units); traditional variable costs.

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Consumption Ratios; Activity Rates

Bienestar Company produces two types of get-well cards: scentedand regular. Drivers for the four activities are as follows:

	Scented Cards	Regular Cards
Inspection hours	180	120
Setup hours	70	30
Machine hours	160	480
Number of moves	480	120

The following activity data have been collected:

Inspecting products	$7,500
Setting up equipment	4,750
Machining	5,120
Moving materials	2,700

Required:

1. Calculate the consumption ratios for thefour drivers (round to two decimal places).

	Scented Cards	Regular Cards
Inspection hours
Setup hours
Machine hours
Number of moves

2. Calculate the activity rates that would beused to assign costs to each product (round to two decimalplaces).

Rates:
Inspecting products	$ per inspection hour
Setting up equipment	$ per setup hour
Machining	$ per machine hour
Moving materials	$ per move

3. Suppose that the activity rate forinspecting products is $20 per inspection hour. How many hours ofinspection are expected for the coming year?
inspection hours

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Resource and Activity-Based CostDriversâEyeGuard Equipment Inc. (EEI) manufacturesprotective eyewear for use in commercial and home applications. Theproduct is also used by hunters, home woodworking hobbyists, and inother applications. The firm has two main product linesâthehighest-quality product is called Safe-T, and a low-cost, valueversion is called Safe-V. Information on the factory conversioncosts for EEI is as follows:

	FactoryCosts
Salaries	$ â 850,000
Supplies	150,000
Factory expense	â 550,000
	$1,550,000

EEI uses ABC costing to determine the unit costs of itsproducts. The firm uses resource consumption cost drivers based onrough estimates of the amount that each activity consumes, as shownbelow. EEI has four activities: job setup, assembly, inspecting andfinishing, and packaging.

	Setup	Assembly	Inspecting & Finishing	Packaging	Total
Salaries	15%	55%	20%	10%	100%
Supplies	20	60â	20â		100
Factory expense		80â	20â		100

The activity cost drivers for the two products are summarizedbelow.

Activities	ActivityDriver
Setup	Batch
Assembly	Units
Inspect and finishing	Hours
Packaging	Hours

	Safe-V	Safe-T
Batches	250	600
Units	60,000	72,000
Finishing hours, per unit	0.2	0.3
Packaging hours, per unit	0.1	0.15
Materials per unit	$ 3.50	$ 6.00

Required

Determine the amount of the cost pool for each of the fouractivities.

Determine the activity-based rates for assigning factory coststo the two products.

Determine the activity-based unit cost for each of theproducts.

What is the strategic role of the information obtained inrequirement 3?

The quantities of resource consumption cost drivers used werebased on rough estimates. Under what conditions would you recommendthat more accurate cost driver data be collected?

Activity-Based Costing

Hercules Industries manufactures two types of electrical powerunits, custom and standard, which involve four overheadactivitiesâproduction setup, procurement, quality control, andmaterials management. An activity analysis of the overhead revealedthe following estimated costs and activity bases for theseactivities:

Activity	Cost	Activity Base
Production setup	$ 87,000	Number of setups
Procurement	159,500	Number of purchase orders (PO)
Quality control	174,000	Number of inspections
Materials management	140,000	Number of components
Total	$560,500

The activity-base usage quantities for each product are asfollows:

	Setups	Purchase Orders	Inspections	Components	UnitVolume
Custom	300	1,200	2,400	400	2,000
Standard	300	250	500	300	2,000
Total	600	1,450	2,900	700	4,000

a. Determine an activity rate for eachactivity.

Activity Rates	Production Setup		Procurement		Quality Control		Materials Management
Activity cost	$		$		$		$
Activity base
Activity rate	$	/setup	$	/PO	$	/inspection	$	/component

b. Assign activity costs to each product, anddetermine the unit activity cost using the activity rates from part(a). Round unit costs to the nearest cent.

	Custom	Standard
Setups Total	$	$
Purchase Orders Total
Inspections Total
Components Total
Total product cost	$	$
Unit volume
Unit cost	$	$

c. Assume that each product required one directlabor hour per unit. Determine the per unit cost if factoryoverhead is allocated on the basis of direct labor hours. Roundyour answer to the nearest cent.
$per unit

d. The custom product will consumemore materials management activities than will thestandard product.

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ACC 406 Chapter 7: Chapter 7.docx

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