Question

Saludable Company produces two types of get-well cards: scented and regular. Drivers for the four activities are as follows:

	Scented Cards		Regular Cards
Inspection hours	100		90
Setup hours	90		30
Machine hours	170		630
Number of moves	210		55

The following activity data has been collected:

Inspecting products	$4,930
Setting up equipment	4,700
Machining	6,500
Moving materials	1,370

Required:

1. Calculate the consumption ratios for the four drivers. Round your answers to two decimal places.

	Scented Cards	Regular Cards
Inspection hours
Setup hours
Machine hours
Number of moves

2. Which of the following statements indicate there is product diversity?

Explain the significance of product diversity for decision making if the company chooses to use machine hours to assign all overhead.

If machine hours are used as the only driver, cards would receive 21% of the overhead, and cards would receive 79% of the overhead. Yet, the cards consume well over 53% of the non-machine related overhead. Thus, the Scented cards are , and the Regular cards are . This inaccuracy can adversely affect many decisions, including pricing, keep or drop, and cost-volume-profit.

3. Calculate the activity rates that would be used to assign costs to each product. Round your answers to the nearest cent.

Rates:
Inspecting products	$ per inspection hour
Setting up equipment	$ per setup hour
Machining	$ per machine hour
Moving materials	$ per move

4. Suppose that the activity rate for inspecting products is $20 per inspection hour. How many hours of inspection are expected for the coming year? If required, round your answer to nearest whole number of hours.
inspection hours

Answer 1

1 Consumption ratios for the four drivers in relation to both the cards will be consumption for a particular card/total consumption for both the cards which will be as follows :-

	Scented cards	Regular cards
Inspection hours	100/190=0.53	90/190=0.47
Set up hours	90/120=0.75	30/120=0.25
Machine hours	170/800=0.21	630/800=0.79
Number of moves	210/265=0.79	55/265=0.21

2 .There has been diversification of different activities or drivers among both the products, thus increasing significance of activity Based distribution of overheads. Since if we use blanket rate for allocation of overhead on the basis of machine hours, it will certainly leads to a distorted view as machine hours are significantly higher in case of regular cards whereas consumption of other resources is comparatively lower for it. This, in such a situation it's significance certainly gets increased.

3. Activity rates which could be used to assign cost to each product will be calculated as

Total cost for the driver/number of units of that driver. It is calculated in the table as follows :-

Driver/activity	(A) total cost	( B ) number of units (hours) of driver/activity	(C=A÷B) cost per unit (hour) of driver/activity
Inspecting products	4930	190 (100+90)	25.95
Setting up equipment	4700	120 (90+30)	39.17
Machining	6500	800 (170+630)	8.13
Moving material	1370	265 (210+55)	5.17

4 . We have total inspection cost as 4930

And activity rate for inspecting product is $20per inspecting hour

This total inspecting hours will be = 4930/20=246.5 hours

Thus total inspection hours would be 246.5.