Question

Cornerstone Exercise 4.5 (Algorithmic)

Activity-Based Product Costing

Roberts Company produces two weed eaters: basic and advanced. The company has four activities: machining, engineering, receiving, and inspection. Information on these activities and their drivers is given below.

		Basic		Advanced		Total
Units produced		80,000		240,000		------
Prime costs		$6,720,000		$27,360,000		$34,080,000
Machine hours		80,000		400,000		480,000
Engineering hours		500		4,500		5,000
Receiving orders		200		600		800
Inspection hours		800		1,600		2,400
Overhead costs:
Machining		$7,200,000
Engineering		2,250,000
Receiving		192,000
Inspecting products		336,000

Required:

1. Calculate the four activity rates.

Machining rate	$ per machine hour
Engineering rate	$ per hour
Receiving rate	$ per order
Inspecting rate	$ per hour

2. Calculate the unit costs using activity rates. Round your answers to the nearest cent.

	Unit cost
Basic	$ per unit
Advanced	$ per unit

Calculate the overhead cost per unit. Round your answers to the nearest cent.

	Overhead Cost
Basic	$ per unit
Advanced	$ per unit

3. What if consumption ratios instead of activity rates were used to assigned costs? Show the cost assignment for the inspection activity.

	Cost assignment
Basic	$
Advanced	$

Answer 1

Req 1:
STATEMENT SHOWING ACTIVITY RATE OF ACTIVITY POOL
			Activity	Total	Expected	Activity
ACTIVITY COST POOL			Measures	Overheads	Activity	Rate
machining			MH	7200000	480000	15	per MH
Engineering			Engg. Hour	2,250,000	5,000	450	Per engg. Hour
Receiving			Orders	192,000	800	240	Per order
Inspecting Products			Inspections hrs	336,000	2,400	140	Per inspection hour
Req 2:
			BASIC			ADVANCED
Activity	Activity rate		Activity Incurred		Amount	Activity Incurred		Amount
Machining	15 per MH		80000		1200000	400000		6000000
Engineering	450 per engg. Hour		500		225000	4500		2025000
Receiving	240 per order		200		48000	600		144000
Inspections	140 per inspecting hour		800		112000	1600		224000
		Total overheads			1585000			8393000
		Number of units			80000			240000
		OH cost per unit			19.81			34.97
UNIT COST
			BASIC		ADVANCED
Prime Cost			6720000		27360000
Overheads			1585000		8393000
Total cost			8305000		35753000
Number of units			80000		240000
Unit cost			103.81		148.97
		Unit cost
Basic		103.81
Advanced		148.97
		OH cost
Basic		19.81
Advanced		34.97
Req 3:
Total Overheads:		$9,978,000
Total Prime cost		$34,080,000
Pre-determined OH rate: $ 9978000 /34080,000 *100 = 29.275%
			Basic	Advanced
Prime cost			6720000	27360000
OH rate 29.275% of Prime cost			1967280	8009640
		Cost Assigned
Basic		$1,967,280
Advanced		$8,009,640