Question

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		100,000		300,000		—
Prime costs		$8,000,000		$30,000,000		$38,000,000
Machine hours		100,000		500,000		600,000
Engineering hours		400		3,600		4,000
Receiving orders		400		1,200		1,600
Inspection hours		800		1,600		2,400
Overhead costs:
Machining		$6,000,000
Engineering		2,000,000
Receiving		560,000
Inspecting products		360,000

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. If consumption ratios instead of activity rates were used to assign costs instead of activity rates, show the cost assignment for the inspection activity.

Answer 1

Part 1

Machining rate = $6,000,000/600,000(100000+500000) = $10per machine hour

Engineering rate: $2,000,000/4,000(400+3600) = $500 per hour

Receiving rate: $560,000/1,600(400+1200) = $350 per order

Inspecting rate: $360,000/2,400(800+1600)= $150 per hour

Part 2

	Basic	advanced
Prime costs :	8000000	30000000
Overhead costs :
Machining
10*100000	1000000
10*500000		5000000
Engineering
500*400	200000
500*3600		1800000
Receiving
350*400	140000
350*1200		420000
Inspecting products
150*800	120000
150*1600		240000
Total manufacturing costs	9460000	37460000
Units of production	100000	300000
Unit cost	94.60	124.87

Prime cost per unit:

Basic = $8,000,000 ÷ 100,000 = $80.00

Advanced = $30,000,000 ÷ 300,000 = $100.00

Overhead cost per unit:

Basic: $94.60 − $80.00 = $14.60

Advance : $124.87 − $100.00 = 24.87

Part 3

Using the consumption ratios instead of activity rates this will yield exactly the same overhead assignments because the activity rates is an actual activity usage as same as the expected usage.