Question

1. Activity-Based Product Costing

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			$444,600
Setup			190,000
Inspection			91,200
Shipping			151,200
Customer service			52,800
	Total		$929,800

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			3,430		130		240		720		40		8,575
Brown sugar			2,180		190		360		1,980		250		5,450
Powdered sugar			2,190		180		600		900		110		5,475
	Total		7,800		500		1,200		3,600		400		19,500

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

Activity		Budgeted Activity Cost [A]	cost driver	Total activity [B]	Activity rates [A]/[B]
Production		$444,600	Machine hours	7,800	$57	per machine hour
Setup		190,000	Number of set ups	500	$380	per setup
Inspection		91,200	Number of inspection	1200	$76	per move
Shipping		151,200	Number of customer order	3,600	$42	per cust. ord.
Customer service		52,800	customer service requiest	400	$132	per customer service request
		$929,800

2)Total aCTIVITY COST

working note:

Activity	Rate	White sugar	brown sugar	Powdered sugar	Total
Production	$57	$195,510[$57*3430]	$124,260[$57*2180]	$124,830[$57*2190]	$444,600
Setup	$380	$49,400[$380*130	$72,200[$380*190	$68,400[$380*180	$190,000
Inspection	$76	$18,240[$76*240]	$27,360[$76*360	$45,600[$76*600]	$91,200
Shipping	$42	$30,240[$42*720]	$83,160[$42*1980]	$37,800[$42*900]	$151,200
Customer service	$132	$5,280[$132*40]	$33,000[$132*250]	$14,520[$132*110]	$52,800
Total product cost		$298,670	$339,980	$291,150	$929,800
Number of units		8,575	5,450	5,475
Per unit cost		$34.83[$298,670/8575]	$62.38	$53.18

	Total Activity Cost	Activity Cost Per Unit
White sugar	$298,670	$34.83
Brown sugar	$339,980	$62.38
Powdered sugar	$291,150	$53.18

3. The unit costs are different because the products consume many activities in ratios different from the machine hour per unit consumption

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