Question

Activity Cost Pools, Activity Rates, and Product Costs using Activity-Based Costing

Caldwell Home Appliances Inc. is estimating the activity cost associated with producing ovens and refrigerators. The indirect labor can be traced into four separate activity pools, based on time records provided by the employees. The budgeted activity cost and activity-base information are provided as follows:

Activity	Activity Pool Cost			Activity Base
Procurement		$12,600		Number of purchase orders
Scheduling		90,000		Number of production orders
Materials handling		11,000		Number of moves
Product development		50,000		Number of engineering changes
Total cost		$163,600

The estimated activity-base usage and unit information for two product lines was determined as follows:

		Number of Purchase Orders			Number of Production Orders			Number of Moves			Number of Engineering Change Orders			Units
Ovens			400			800			300			80			1,000
Refrigerators			300			400			200			120			500
	Totals		700			1,200			500			200			1,500

a. Determine the activity rate for each activity cost pool.

Procurement (per purchase order)	$
Scheduling (per production order)	$
Materials handling (per move)	$
Product development (per engineering change order)	$

b. Determine the activity-based cost per unit of each product. Round the per unit rates to the nearest cent.

Ovens	$ per unit
Refrigerators	$ per unit

Answer 1

Solution

Procurement (per purchase order)	$ 18
Scheduling (per production order)	$ 75
Materials handling (per move)	$22
Product development (per engineering change order)	$250

.

	Activity Cost per unit
Product F	$                 93.80
Product G	$               139.60

Working

Calculation of Activity rates
Activity Cost Pool	Activity driver	Overhead Cost (A)	Expected Activity (B)	Activity rate (A/B)
Procurement	Number of purchase order	$ 12,600	700	$             18.00	Per purchase order
Scheduling	Number of production order	$ 90,000	1200	$             75.00	Per production order
Materials handling	Number of moves	$ 11,000	500	$             22.00	Per moves
Materials handling	Number of engineering change	$ 50,000	200	$          250.00	Per engineering change

.

Cost assigned to Product F
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Procurement	$           18.00	400.00	$ 7,200.00
Scheduling	$           75.00	800.00	$ 60,000.00
Materials handling	$           22.00	300.00	$ 6,600.00
Materials handling	$        250.00	80.00	$ 20,000.00
Total Overheads assigned			$ 93,800.00
Production			1,000.00
Overhead cost per unit			$ 93.80

.

Cost assigned to Product G
Activity name	Activity Rates	Activity	ABC Cost
	(A)	(B)	(A x B)
Procurement	$           18.00	300	$ 5,400
Scheduling	$           75.00	400	$ 30,000
Materials handling	$           22.00	200	$ 4,400
Materials handling	$        250.00	120	$ 30,000
Total Overheads assigned			$             69,800.00
Production			500.00
Overhead cost per unit			$              139.60