Question

Activity Rates and Activity-Based Product Costing

Hammer Company produces a variety of electronic equipment. One of its plants produces two laser printers: the deluxe and the regular. At the beginning of the year, the following data were prepared for this plant:

	Deluxe	Regular
Quantity	100,000	800,000
Selling price	$900	$750
Unit prime cost	$529	$483

In addition, the following information was provided so that overhead costs could be assigned to each product:

Activity Name	Activity Driver	Deluxe	Regular	Activity Cost
Setups	Number of setups	300	200	$2,100,000
Machining	Machine hours	100,000	300,000	40,000,000
Engineering	Engineering hours	50,000	100,000	9,000,000
Packing	Packing orders	100,000	400,000	400,000

Required:

1. Calculate the overhead rates for each activity. If required, carry your answers out to the nearest cent.

Setups	$ per setup
Machining	$ per machine hour
Engineering	$ per engineering hour
Packing	$ per packing order

2. Calculate the per-unit product cost for each product. Round your answers to the nearest whole dollar.

Deluxe	$per unit
Regular	$per unit

Answer 1

1) Calculation of Activity rate (Amounts in $)

Activity Name	Activity Driver	Activity Cost (A)	Total Activity (B)	Activity Rate (A/B)
Setups	Number of setups	2,100,000	500 setups	$4,200 per setup
Machining	Machine hours	40,000,000	400,000 hrs	$100 per hr
Engineering	Engineering hours	9,000,000	150,000 hrs	$60 per hr
Packing	Packing orders	400,000	500,000 orders	$0.80 per order

2) Firstly we need to allocate overhead to each product using activity rates which is shown as follows:-

Allocation of Overhead to each product (Amounts in $)

	Deluxe	Regular
Setups	1,260,000 (300*$4,200)	$840,000 (200*$4,200)
Machining	10,000,000 (100,000*$100)	30,000,000 (300,000*$100)
Engineering	3,000,000 (50,000*$60)	6,000,000 (100,000*$60)
Packing	80,000 (100,000*$0.80)	320,000 (400,000*$0.80)
Total Allocated Overhead (C)	14,340,000	37,160,000
Units Produced (D)	100,000	800,000
Overhead cost per unit (C/D)	$143.40	$46.45

Calculation of per unit product cost for each product (Amounts in $)

	Deluxe	Regular
Unit prime cost (i)	529	483
Overhead cost per unit (ii) (rounded off to nearest dollar)	143	46
Total per unit product cost [(i)+(ii)]	672	529

Deluxe	$672 per unit
Regular	$529 per unit