Question

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:

Activity		Budgeted Activity Cost
Production			$489,100
Setup			259,000
Inspection			110,400
Shipping			180,600
Customer service			93,100
	Total		$1,132,200

The activity bases identified for each activity are as follows:

Activity	Activity Base
Production	Machine hours
Setup	Number of setups
Inspection	Number of inspections
Shipping	Number of customer orders
Customer service	Number 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		180		240		860		70		7,375
Brown sugar			1,880		270		360		2,370		440		4,700
Powdered sugar			1,870		250		600		1,070		190		4,675
	Total		6,700		700		1,200		4,300		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 Cost	Activity 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  .

Answer 1

Answer 1)

Calculation of Activity rate for each Activity

Activity Centre	Cost Driver	Manufacturing overheads (In $)	Total number of events	Activity Rate (Total Costs/ Total number of events) (In $)
Production	Machine hours	489,100	6,700	73.00
Setup	Number of Setups	259,000	700	370.00
Inspection	Number of Inspections	110,400	1,200	92.00
Shipping	Number of Customer Orders	180,600	4,300	42.00
Customer Care	Number of Customer Service	93,100	700	133.00
Total	1,132,200

Answer 2)

Calculation of total and per unit activity cost for all three costs

Activity Centre	Cost Driver	Activity Rate (In $)	Total number of Activities Consumed	Assigned Activity Costs (Activity Rates X Activity Consumed)       (In $)
White Sugar	Brown Sugar	Powdered Sugar	White Sugar	Brown Sugar	Powdered Sugar
Production	Machine hours	73.00	2,950	1,880	1,870	215,350	137,240	136,510
Setup	Number of Setups	370.00	180	270	250	66,600	99,900	92,500
Inspection	Number of Inspections	92.00	240	360	600	22,080	33,120	55,200
Shipping	Number of Customer Orders	42.00	860	2,370	1,070	36,120	99,540	44,940
Customer Care	Number of Customer Service	133.00	70	440	190	9,310	58,520	25,270
Total (A)	349,460	428,320	354,420
Number of units manufactured (B)	7,375	4,700	4,675
Manufacturing overheads per unit (A)/ (B)	47.38	91.13	75.81

Answer 3)

Machine hours consumed by each product

White Sugar = Total machine hours consumed/ number of units manufactured

                        = 2,950 machine hours/ 7,375 units

                        = 0.40 machine hour per unit

Brown Sugar = Total machine hours consumed/ number of units manufactured

                        = 1,880 machine hours/ 4,700 units

                        = 0.40 machine hour per unit

Powdered Sugar = Total machine hours consumed/ number of units manufactured

                        = 1,870 machine hours/ 4,675 units

                        = 0.40 machine hour per unit

Even though each product consumes 0.40 machine hours per unit, still the activity unit costs are different. It is because under Activity Based costing, Activity costs (Overheads) are allocated on the basis of different activity rates (unlike in case of Traditional costing where single predetermined rate is used for allocation of overheads). Since the activities consumed by each product are different, if overheads are allocated on the basis of activity rates for different activities, the total and per unit activity costs are different for the three products.