Question

Activity-Based Product Costing

Sweet Sugar Company manufactures three products (white sugar, brown sugar, and powdered sugar) 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:

ActivityBudgeted Activity Cost

Production $448,900

Setup 130,200

Inspection 94,600

Shipping 136,400

Customer service 79,800

Total $889,900

The activity bases identified for each activity are as follows:

ActivityActivity Base

ProductionMachine hours

SetupNumber of setups

InspectionNumber of inspections

ShippingNumber of customer orders

Customer serviceNumber of customer service requests

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

   Machine Hours Number of
Setups Number of
Inspections Number of
Customer Orders Customer
Service
Requests Units

White sugar 2,950 80 220 880 70 7,375

Brown sugar 1,880 110 330 2,420 440 4,700

Powdered sugar 1,870 110 550 1,100 190 4,675

Total 6,700 300 1,100 4,400 700 16,750

Each product requires 0.9 machine hour per unit.

Required:

If required, round all per unit amounts to the nearest cent.

1. Determine the activity rate for each activity.

Production$ per machine hour

Setup$ per setup

Inspection$ per move

Shipping$ per cust. ord.

Customer service$ per customer service request

2. Determine the total and per-unit activity cost for all three products.

Total Activity CostActivity Cost Per Unit

White sugar$$

Brown sugar

Powdered sugar

3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?

The unit costs are different because the products consume many activities in ratios different from the  .

Answer 1

1.Determination of "Activity Rate" For Each Activity:-

Activity Cost Pool	Activity Cost($) (A)	Activity Driver (B)	Activity Driver Rate($) (C)=(A)/(B)
Production	448,900	No. of Machine Hours (6,700hrs)	67
Set Up	130,200	No. of Set ups (300)	434
Inspection	94,600	No. of Inspections (1,100)	86
Shipping	136,400	No. of Customer Orders(4,400)	31
Customer Service	79,800	No. of Customer Service Request(7,00	114
Total	$889,900

2.Statement Showing Computation of Cost of Products:-

PARTICUALRS OF COST	COST DRIVER	WHITE SUGAR	PER UNIT ACTIVITY COST	BROWN SUGAR	PER UNIT ACTIVITY COST	POWDERED SUGAR	PER UNIT ACTIVITY COST	TOTAL
UNITS	-	7375		4,700		4675		16,750
Production Cost	No. of Machine Hours	4,44,713 (0.9hrs*7375 units*67)	60.30	283,410 (0.9*4700units*67)	60.3	2,81,903 (0.9*4675units*67)	60.30
Set up	No.of Set ups	34720 (434*80Setups)	4,7	47,740 (434*110 Setups)	10.15	47,740 (434*110setups)	10.21
Inspection Cost	No.of Inspections	18,920 (220*86)	2.57	28,380 (330*86)	6.04	47,300 (550*86)	10.12
Shipping	No.of Customer orders	27,280 (880*31)	3.70	75,020 (2420*31)	15.96	34,100 (1100*31)	10.11
Customer Service	No.of Customer Service Request	7980 (70*114)	1.08	50,160 (440*114)	10.67	21660 (190*114)	4.63
Total		5,33,613	72.35	4,84,710	103.12	4,32,703	92.56