In: Accounting
Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:
1 |
Activity |
Activity Cost Pool |
2 |
Production |
$270,840.00 |
3 |
Setup |
98,945.00 |
4 |
Material handling |
10,604.00 |
5 |
Inspection |
44,100.00 |
6 |
Product engineering |
139,380.00 |
7 |
Total |
$563,869.00 |
The activity bases identified for each activity are as follows:
Activity |
Activity Base |
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 the three products were determined from corporate records and are as follows:
Machine | Number of | Number of | Number of | Number of | ||
Hours | Setups | Parts | Inspection Hours | Engineering Hours | Units | |
Alpha | 1,061 | 55 | 84 | 467 | 130 | 1,341 |
Beta | 767 | 125 | 158 | 281 | 183 | 927 |
Omega | 392 | 205 | 240 | 232 | 192 | 542 |
Total | 2,220 | 385 | 482 | 980 | 505 | 2,810 |
Each product requires 40 minutes per unit of machine time.
Required: | |||||||||
Complete the Activity Tables for Alpha, Beta and Omega.
|
Solution 1:
Determination of activity rate for each activity | ||||
Activity | Estimated Overhead Cost | Activity Base | Usage of Activity Base | Activity Rate |
Production | $270,840.00 | Machine hours | 2220 | $122.00 |
Setup | $98,945.00 | Nos of setups | 385 | $257.00 |
Material handling | $10,604.00 | Nos of parts | 482 | $22.00 |
Inspection | $44,100.00 | Nos of inspection hours | 980 | $45.00 |
Product Engineering | $139,380.00 | Nos of engineering hours | 505 | $276.00 |
Solution 2:
Allocation of overhead and computation of Activity cost per unit | ||||||||||
Activity | Estimated Overhead Cost | Activity Base | Usage of Activity Base | Activity Rate | Alpha | Beta | Omega | |||
Usage | Allocated Costs | Usage | Allocated Costs | Usage | Allocated Costs | |||||
Production | $270,840.00 | Machine hours | 2220 | $122.00 | 1061 | $129,442.00 | 767 | $93,574.00 | 392 | $47,824.00 |
Setup | $98,945.00 | Nos of setups | 385 | $257.00 | 55 | $14,135.00 | 125 | $32,125.00 | 205 | $52,685.00 |
Material handling | $10,604.00 | Nos of parts | 482 | $22.00 | 84 | $1,848.00 | 158 | $3,476.00 | 240 | $5,280.00 |
Inspection | $44,100.00 | Nos of inspection hours | 980 | $45.00 | 467 | $21,015.00 | 281 | $12,645.00 | 232 | $10,440.00 |
Product Engineering | $139,380.00 | Nos of engineering hours | 505 | $276.00 | 130 | $35,880.00 | 183 | $50,508.00 | 192 | $52,992.00 |
Total | $563,869.00 | $202,320.00 | $192,328.00 | $169,221.00 | ||||||
Nos of units | 1341 | 927 | 542 | |||||||
Overhead cost per unit | $150.87 | $207.47 | $312.22 |
solution 3:
Activity unit costs cannot be equal across all three products since they require the same machine time per unit, there are lots of other activities which requires different usage across the products and under activity based costing, costs are allocated to products the on the basis of efforts involved in different activities by each products. Therefore unit activity cost cannot be equal for all three products.