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 volume .

Feedback

1. Calculate Activity Rate for each activity:

Total Cost ÷ Total Activity-Base = Activity Rate

2. Calculate Activity Cost for each product:

Activity-Base Usage x Activity rate from Req. (1) = Activity cost; Sum all activity costs per product to determine a total and divide the total overhead by budgeted units to derive the activity costs per unit for each product.

Answer 1

1 .Activity based costing uses different cost drivers for allocating cost to its products

	Cost [A]	Cost driver [B]	Activity rate [A/B]
Production	$448,900	6,700 Machine hours	$67 per machine hour
Set up	$130,200	300 setups	$434 per setup
Inspection	$94,600	1,100 inspections	$86 per inspection
Shipping	$136,400	4,400 customer orders	$31 per customer order
Customer services	$79,800	700 requests	$114 per customer request
	889,900

2.cost allocated = Activity rate* cost driver utilised by product

	Activity rate [A/B]	white	Brown	Powdered
Production	$67 per machine hour	$197,650[$67*2950]	$125,960[$67*1880]	$125,290[$67*1870]
Set up	$434 per setup	$34,720[$434*80]	$47,740[$434*110]	$47,740[$434*110]
Inspection	$86 per inspection	$18,920[$86*220]	$28,380[330*$86]	$47,300[550*$86]
Shipping	$31 per customer order	$27,280[$31*880]	$75,020[2,420*$31]	$34,100[1,100*$31]
Customer services	$114 per customer request	$7,980[$114*70]	$50,160[$114*440]	$21,660[190*$114]
Total		$286,550	$327,260	$276,090
Number of units		7,375	4,700	4,675
cost per unit		$38.85[$286,550/7,375]	$69.63[$327,260/4,700]]	$59.06[$276,090/4,675]

unit costs are different because product consume many activities in ratios different from the volume.

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