Question

In: Accounting

Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) in...

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.
1. Determine the activity rate for each activity.*
2. Use the activity rates in (1) to determine the total and per-unit activity costs associated with all three products.*
3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?
*If required, round all per-unit amounts to the nearest cent.

Solutions

Expert Solution

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.


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