Question

Case 4

Natha Corporation manufacturers two types of travel mugs: Simple, and Sophisticated. The company budgets to produce 20,000 units of the Simple mugs and 10,000 units of the Sophisticated mugs. Manufacturing takes place in two production departments: Machining and Assembly. The Simple mugs are produced in batches of 200 units; however, due to the more intricate detail included on the Sophisticated mugs, they are produced in batches of 50 units.

The company’s Controller has asked you to compare the plantwide, departmental, and activity- based cost allocation methods. To assist in your analysis, the Controller has provided you with the budgeted cost information for the 2020 fiscal year.

Natha Budgeted Information for the Year Ended December 31, 2020
Machining Department	Simple	Sophisticated	Total
Direct materials cost	$90,000.00	$52,500.00	$142,500.00
Direct labour cost	45,000.00	30,000.00	75,000.00
Overhead costs			120,000.00
Machine hours	12,000	18,000	30,000
Direct labour hours	4,000	1,000	5,000
Assembly Department	Simple	Sophisticated	Total
Direct materials cost	$7,500.00	$15,000.00	$22,500.00
Direct labour cost	22,500.00	37,500.00	60,000.00
Overhead costs			40,000.00
Machine hours	6,000	4,000	10,000
Direct labour hours	3,500	500	4,000

Required:

3. Assume that management at Natha Corporation has decided to implement an activity- based costing system. You have identified three relevant activities. Information for each activity is shown below.

Quantity of Cost Driver
Activities	Cost Driver	Activity Cost	Simple	Sophisticated	Total
Materials handling	Number of parts	$45,000.00	6,000	9,000	15,000
Setups	Number of setups	$74,500.00	104	45	149
Inspection	Inspection hours	$40,500.00	7,500	1,500	9,000
		$160,000.00

1. Calculate the activity-based costing overhead rates.
2. Calculate the total manufacturing cost for each product line.
3. Calculate the total manufacturing cost per unit for each product line.

Answer 1

Activity rate:
Actiivity		Total OH	Total Driver	Activity rate
Material handling	45000	15000	3	Per part
Setups		74500	149	500	Per setup
Inspection	40500	9000	4.5	Per inspection hour
Activity cost allocated
Activity		Rate	SIMPLE	SOPHISTICATD
			Driver	OH cost	Driver	OH cost
Material handling	3	6000	18000	9000	27,000
Setups		500	104	52000	45	22,500
Inspection	4.5	7500	33750	1500	6,750
		Total Activity cost	103750		56,250
Total Manufacturing cost
		Simple	Sophisticated
Machining
Material		90000	52500
Labour		45000	30000
Assembly
Direct material	7500	15000
Direct labour	22500	37,500
Activity oh cost	103750	56,250
Total Mfg cost	268750	191250
Total MFG cost per unit
		Simple	Sophisticated
Total MFG cost	268750	191250
Divide: Units	20000	10,000
Total Mfg cost per unit	13.4375	19.125