Question

Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) 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:

1	Activity	Activity Cost Pool
2	Production	$259,200.00
3	Setup	55,000.00
4	Material handling	9,750.00
5	Inspection	60,000.00
6	Product engineering	123,200.00
7	Total	$507,150.00

The activity bases identified for each activity are as follows:

Activity	Activity Base
Production	Machine hours
Setup	Number of setups
Material handling	Number of parts
Inspection	Number of inspection hours
Product engineering	Number of engineering hours

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

	Machine	Number of	Number of	Number of	Number of
	Hours	Setups	Parts	Inspection Hours	Engineering Hours	Units
Alpha	1,440	75	65	400	125	1,800
Beta	1,080	165	80	300	175	1,350
Omega	720	310	180	500	140	900
Total	3,240	550	325	1,200	440	4,050

Each product requires 40 minutes per unit of machine time.

Required:

Complete the Activity Tables for Alpha, Beta and Omega. 1. Determine the activity rate for each activity.* 2. Use the activity rates in (1) to determine the total and per-unit activity costs associated with all three products.* 3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit? * If required, round all per-unit amounts to the nearest cent.

Answer 1

1) Calculation of Activity rate for each activity (Amount in $)

Activity	Activity Cost Pool (A)	Activity Base	Total Activity Base Usage (B)	Activity Rate (A/B)
Production	259,200	Machine hours	3,240 Machine hrs	80 per machine hour
Setup	55,000	Number of setups	550 setups	100 per setup
Material Handling	9,750	Number of parts	325 parts	30 per part
Inspection	60,000	Number of inspection hours	1,200 hours	50 per hour
Product Engineering	123,200	Number of engineering hours	440 hours	280 per hour

2) Activity cost for each product will be calculated by multiplying usage of each product's activity with their respective activity rate. Calculation of unit activity cost and total activity cost is shown as follows:-   

Calculation of activity costs for all products (Amount in $)

Activity	Alpha	Beta	Omega	Total
Production ($80*Machine hours)	($80*1,440) = 115,200	($80*1,080) = 86,400	($80*720) = 57,600	259,200
Setup ($100*No. of setups)	($100*75) = 7,500	($100*165) = 16,500	($100*310) = 31,000	55,000
Material Handling ($30*No. of parts)	($30*65) = 1,950	($30*80) = 2,400	($30*180) = 5,400	9,750
Inspection ($50*No. of inspection hrs)	($50*400) = 20,000	($50*300) = 15,000	($50*500) = 25,000	60,000
Product Engineering ($280*No. of engineering hrs)	($280*125) = 35,000	($280*175) = 49,000	($280*140) = 39,200	123,200
Total cost of activity (A)	179,650	169,300	158,200	507,150
Units Produced (B)	1,800	1,350	900	4,050
Activity costs per unit (A/B)	99.81	125.41	175.78

Thus activity costs are $99.81, $125.41 and $175.78 per unit for Alpha, Beta and Omega respectively.

3) Although machine time required per unit is same for each product but the each activity costs are allocated on the basis of different activity bases such as machine hours, setups, parts, inspection hours etc. The usage of each product for these activities are different therefore the allocation of activity costs to each product is different. Hence the activity costs per unit are not equal across all three products.