Question

Aquamarine plans to manufacture two lines of chairs in the coming year – lounge and patio. The company is considering introducing an activity-based costing system. Given below are each activity, its cost and its related activity driver.

Activity	Cost	Activity Driver
Material setups	$200,000	Number of setups
Material handling	$150,000	Number of parts
Cutting	$600,000	Number of parts
Assembly	$300,000	Direct labour hours
Finishing	$600,000	Number of units

The level of activity for the year is:

	Lounge	Patio
Units to be produced	10,000	5,000
Number of setups	60	60
Number of parts per unit	10	5
Direct labour hours per unit	4	2

Required

1. Under an activity-based costing system, what is the activity cost per unit of activity driver for assembly?

Answer 1

Solution

	Activity rate
Material setup	$ 1,666.67	Per setup
Material handling	$          1.20	Per part
Cutting	$          4.80	Per part
Assembly	$          6.00	Per Direct labor hour
Finishing	$       40.00	Per unit

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Material setup	Number of setup	$ 200,000	120	$       1,666.67	Per setup
Material handling	Number of part	$ 150,000	125000*	$               1.20	Per part
Cutting	Number of part	$ 600,000	125000	$               4.80	Per part
Assembly	Number of Direct labor hour	$ 300,000	50000	$               6.00	Per Direct labor hour
Finishing	Number of unit	$ 600,000	15000	$             40.00	Per unit

.*(10000*10)+(5000*5)