Question

EgoDrone Inc. manufactures two models of “Selfie Drones” - small toy helicopters which follow users around taking aerial video while the user participates in extreme sports. Whether the user is rafting down a raging river, or renewing their life insurance, all activities can be documented by the products two models: “Sport” or “Pro”.   The company will use activity-based costing to apply its estimated $350,000 of overhead costs to its products. Information about its overhead follows:

Activity (Cost Driver)		Estimated MOH	Expected Activity
			Total	Sport	Pro
Assembly (Machine Hours)		$40,000	5,000	3,000	2,000
Quality control (# of inspections)		110,000	550	250	300
Machine Setups (# of Setups)		200,000	200	70	130
		$350,000

The following cost data is known:

	Sport	Pro
Direct Materials	$300	$500
Direct Labour	50	80
Number of units produced	250 units	150 units

Required:

1. Compute the activity rates for each activity.
2. Determine the expected unit cost of each product.

Answer 1

Requirement a:

Activity Rate

Activity	Cost Pool	/	Cost Driver	=	Activity Rate
Assembly	$40,000	/	5,000 machine hours	=	$8 per machine hour
Quality Control	$110,000	/	550 inspections	=	$200 per inspection
Machine Setups	$200,000	/	200 setups	=	$1,000 per setup

Requirement b:

Allocation of overhead cost

Sport

Activity	Cost Driver	x	Activity Rate	=	Overhead cost
Assembly	3,000 machine hours	x	$8 per machine hour	=	$24,000
Quality Control	250 Inspections	x	$200 per inspection	=	$50,000
Machine Setup	70 setups	x	$1,000 per setup	=	$70,000
Overhead Cost				=	$144,000

Pro

Activity	Cost Driver	x	Activity Rate	=	Overhead cost
Assembly	2,000 machine hours	x	$8 per machine hour	=	$16,000
Quality Control	300 Inspections	x	$200 per inspection	=	$60,000
Machine Setup	130 setups	x	$1,000 per setup	=	$130,000
Overhead Cost				=	$206,000

Unit Product Cost

Particulars	Sport	Pro
Direct Materials	$300	$500
Direct labor	$50	$80
Overhead cost	$144,000	$206,000
Total Product cost	$144,350	$206,580
Number of units produced	250	150
Unit Product cost	$577.40	$1,377.20

All the best...