Question

Activity-Based Costing

Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activities—production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity bases for these activities:

Activity	Activity Cost		Activity Base
Production setup	$ 56,250		Number of setups
Procurement	147,000		Number of purchase orders (PO)
Quality control	168,000		Number of inspections
Materials management	82,000		Number of components
Total	$453,250

The activity-base usage quantities for each product are as follows:

	Setups		Purchase     Orders		Inspections		Components		Unit Volume
Custom	300		1,200		2,400		250		2,000
Standard	150		200		400		150		2,000
Total	450		1,400		2,800		400		4,000

a. Determine an activity rate for each activity.

Activity Rates	Production Setup		Procurement		Quality Control		Materials Management
Activity cost	$		$		$		$
÷ Activity base
Activity rate	$	/setup	$	/PO	$	/inspection	$	/component

b. Assign activity costs to each product and determine the unit activity cost, using the activity rates from part (a). Round unit costs to the nearest cent.

	Custom		Standard
Setups Total	$		$
Purchase Orders Total
Inspections Total
Components Total
Total product cost	$		$
Unit volume
Unit cost	$		$

c. Assume that each product required one direct labor hour per unit. Determine the per-unit cost if factory overhead is allocated on the basis of direct labor hours. Round your answer to the nearest cent.
$per unit

d. The custom product will consume   materials management activities than will the standard product.

Answer 1

a. Determine an activity rate for each activity.
Activity Rates	Production Setup		Procurement		Quality Control		Materials Management
Activity cost      $	56250	$	147000	$	168000	$	82000
/ Activity Base	450		1400		2800		400
Activity Rate    $	125	/setup                       $	105	/PO                         $	60	/Inspection            $	205	/Component
b. Assign activity costs to each product and determine the unit activity cost ,using the activity rates from part (a).
	Custom	Standard
Setups Total	37500	18,750
Purchase Orders Total	126000	21,000
Inspections Total	144000	24000
Components Total	51250	30750
Total Product Cost	358750	94,500
Unit Volume	2000	2000
Unit Cost	179.38	47.25
			Custom	Standard
Activity	Activity rate		Activity base usage	Activity cost	Activity base usage	Activity cost
Setups Total	125	per setup	300	37500	150	18750
Purchase Orders Total	105	per po	1200	126000	200	21,000
Inspections Total	60	per inspection	2400	144000	400	24,000
Components Total	205	per component	250	51250	150	30,750
Total Product Cost				358750		94,500
Unit Volume				2000		2000
Unit Cost				179.38		47.25
c. Calculate the per - unit cost if factory overhead is allocated on the basis of direct labors.
$	113.31	per unit
Factory Overhead =	(Factory overhead /Direct labor hours )
=	(453250/4000 per direct labor hour)
=	113.31
d. The custom product will consume more materials management activities than will the standard product.