Question

EyeGuard Equipment Inc. (EEI) manufactures protective eyewear for use in commercial and home applications. The product is also used by hunters, home woodworking hobbyists, and in other applications. The firm has two main product lines—the highest-quality product is called Safe-T, and a low-cost, value version is called Safe-V. Information on the factory conversion costs for EEI is as follows:

	Factory Costs
Salaries	$	854,000
Supplies		154,000
Factory expense		554,000
	$	1,562,000

EEI uses ABC to determine the unit costs of its products. The firm uses resource consumption cost drivers based on rough estimates of the amount that each activity consumes, as shown below. EEI has four activities: job setup, assembly, inspecting and finishing, and packaging.

	Setup			Assembly			Inspecting and Finishing			Packaging			Total
Salaries		10	%		50	%		25	%		15	%		100	%
Supplies		15			55			30						100
Factory expense					70			30						100

The activity cost drivers for the two products are summarized below.

Activities	Activity Driver
Setup	Batch
Assembly	Units
Inspect and finishing	Finishing hours
Packaging	Packing hours

	Safe-V			Safe-T
Batches		290			640
Units		64,000			76,000
Finishing hours, per unit		0.40			0.40
Packaging hours, per unit		0.30			0.20
Materials per unit	$	3.00		$	7

Required:

1. Determine the amount of the cost pool for each of the four activities.

2. Determine the activity-driver rates for assigning factory costs to the two products.

3. Determine the activity-based unit cost for each of the products.

Answer 1

Solution 1:

First stage allocation of cost to activity cost pools
Particulars	Total Cost	Setup		Assembly		Inspecting and finishing		Packaging
		%	Amount	%	Amount	%	Amount	%	Amount
Salaries	$854,000.00	10%	$85,400.00	50%	$427,000.00	25%	$213,500.00	15%	$128,100.00
Supplies	$154,000.00	15%	$23,100.00	55%	$84,700.00	30%	$46,200.00	0%	$0.00
Factory expense	$554,000.00	0%	$0.00	70%	$387,800.00	30%	$166,200.00	0%	$0.00
Total	$1,562,000.00		$108,500.00		$899,500.00		$425,900.00		$128,100.00

Solution 2:

Determination of activity rate for each activity and allocation of activity cost to products
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Safe-V		Safe-T
					Usage	Allocated Cost	Usage	Allocated Cost
Setup	$108,500.00	Batch	930	$116.67	290	$33,833	640	$74,667
Assembly	$899,500.00	Units	140000	$6.43	64000	$411,200	76000	$488,300
Inspecting and finishing	$425,900.00	Finishing hours	56000	$7.61	25600	$194,697	30400	$231,203
Packaging	$128,100.00	Packing hours	34400	$3.72	19200	$71,498	15200	$56,602
Total	$1,562,000.00					$711,228		$850,772

solution 3:

Computation of Activity based unit cost
Particulars	Safe-V	Safe-T
Direct materials	$3.00	$7.00
conversion Cost: Safe V - $711,228/64000 Safe T - $850,772 / 76000	$11.11	$11.19
Per unit Cost	$14.11	$18.19