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	$278,280.00
3	Setup	82,677.00
4	Material handling	11,110.00
5	Inspection	54,918.00
6	Product engineering	144,361.00
7	Total	$571,346.00

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	1,057	64	84	475	113	1,374
Beta	861	109	164	317	172	935
Omega	401	208	257	225	218	488
Total	2,319	381	505	1,017	503	2,797 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 (Amounts in $)

Activity	Activity Cost (A)	Activity Base	Total Activity (B)	Activity Rate (A/B)
Production	278,280	Machine Hours	2,319 hours	120 per hour
Setup	82,677	Number of Setups	381	217 per setup
Material handling	11,110	No. of parts	505	22 per part
Inspection	54,918	No. of inspection hours	1,017	54 per hour
Product Engineering	144,361	No. of Engineering hours	503	287 per hour

2) Calculation of Activity Cost (Amounts in $)

Activity	Alpha	Beta	Omega	Total
Production (No. of Machine hour*Activity rate)	126,840 (1,057*$120)	103,320 (861*$120)	48,120 (401*$120)	278,280
Setup (No. of setup*Activity rate)	13,888 (64*$217)	23,653 (109*$217)	45,136 (208*$217)	82,677
Material handling (No. of parts*Activity rate)	1,848 (84*$22)	3,608 (164*$22)	5,654 (257*$22)	11,110
Inspection (No. of inspection hours*Activity rate)	25,650 (475*$54)	17,118 (317*$54)	12,150 (225*$54)	54,918
Product Engineering (No. of Engineering hours*Activity rate)	32,431 (113*$287)	49,364 (172*$287)	62,566 (218*$287)	144,361
Total Activity costs (i)	200,657	197,063	173,626	571,346
Total No. of Units (ii)	1,374	935	488	2,797
Activity Cost per unit [(i)/(ii)]	146.04	210.76	355.79

3) Activity unit cost is different across all three products even they require same machine time per unit because each activity cost is allocated to three products on different activity base. Machine hour is only used for allocating production cost. All other activity cost is allocated based on other activity bases (i.e. No. of setups, no. of parts, no. of inspection hours etc.)