Question

Adirondack Corporation is estimating activity costs associated with producing two different sized e-reader tablets. The indirect labor can be traced to three separate activity pools. The budgeted activity cost and activity base information, along with the estimated activity-base information, is provided below.
ActivityCost Activity Base

Purchasing $250,000 Number of purchase orders

Materials handling $500,000 Number of moves

Production   1,350,000     Machine hours

TOTAL $2,100,000

Number of Purchase Orders; Number of Moves; Machine Hours; Number of Units

7” tablet 3,000 1,500   2,500   2,500

10" tablet 5,000      600   7,500   3,500

TOTALS   8,000 2,100   10,000   6,000

Required: Determine the Activity rate for each activity cost pool. All work must be shown for credit.

Please label your answer as the activity rate for: Purchasing; Materials handling; & Production.

Activity	Activity Cost	Activity Base	Activity Base Total	Activity Cost / Total Activity Base
Purchasing	$250000	Number of Purchase Orders	8000	250000/8000=31.25
Material Handling	$500,000	Number of Moves	2100	500000/2100=238.09
Production	$1350000	Machine Hours	10000	$1350000/10000=135

Using the information from the activity rate you calculated, use the following chart (as a guide- you do not need to replicate the template) to determine the activity cost per tablet:

All work must be shown for credit.

	A	B	C	D	E	F	G
1		7 inch tablet			10 inch tablet
2	Activity	Activity-Base      Usage    ×	Activity Rate	Activity =    Cost	Activity- Base       Usage   ×	Activity Rate	Activity =     Cost
3	Purchasing
4
5						]
6
7
8	Activity cost per tablet

Using the information from the activity based costing problem:

If traditional costing had been used and number of machine hours were the allocation base, what would the single allocation rate be? Would applying a single allocation rate be a wise decision to apply costs in this scenario? Why or why not?

Answer 1

Activity	Activity Rate $	7 inch tablet		10 inch tablet
		Activity Base-Usage	Activity Cost $	Activity Base-Usage	Activity Cost $
Purchasing	31.25	3000	93750	5000	156250
Material handling	238.10	1500	357150	600	142860
Production	135	2500	337500	7500	1012500
Activity cost $			788400		1311610
Number of units			2500		3500
Activity cost per tablet $			315.36		374.75

Note: The activity rate for material handling is $238.10 (if rounded off to 2 decimal places) and not $238.09 as shown in the question since $500000/2100 = $238.095 = $238.10

The activity cost per tablet has been rounded off to 2 decimal places in absence of any instructions regarding the same.

Single allocation rate = $2100000/10000 = $210 per machine hour

Using a single allocation rate would not be proper since it would result in under-allocation to the 7 inch tablet by [$788400 - (2500 x $210)] = $788400 - $525000 = $263400 and over allocation to the 10 inch tablet.