Question

Consumption Ratios; Activity Rates

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	140		60
Setup hours	60		30
Machine hours	200		560
Number of moves	235		65

The following activity data has been collected:

Inspecting products	$4,900
Setting up equipment	4,770
Machining	6,360
Moving materials	1,440

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 26% of the overhead, and   cards would receive 74% of the overhead. Yet, the   cards consume well over 70% 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

Requirement 1: Compute consumption ratios for the four drivers as follows

Particulars	Scented	Regular
Inspection Hours	0.70	0.30
Setup Hours	0.67	0.33
Machine Hours	0.26	0.74
Number of Moves	0.78	0.22

Notes

Inspection hours - scented cards = 0.70 (140 hours ÷ (140 hours + 60 hours))

Inspection hours - regular cards = 0.30 (600 hours ÷ (140 hours + 60 hours))

Setup hours - scented cards = 0.67 (60 hours ÷ (60 hours + 30 hours))

Setup hours - regular cards = 0.33 (30 hours ÷ (60 hours + 30 hours))

Machining hours - scented cards = 0.26 (200 hours ÷ (200 hours + 560 hours))

Machining hours - regular cards = 0.74 (560 hours ÷ (200 hours + 560 hours))

Number of moves - scented cards = 0.78 (235 moves ÷ (235 moves + 65 moves))

Number of moves - regular cards = 0.22 (65 moves ÷ (235 moves + 65 moves))

Requirement 2: The lowest consumption ratio for scented is 0.26 and the highest is 0.78 and on the other hand the lowest consumption ratio for regular is 0.22 and highest is 0.74. The spread in the ratios indicate that there is significant product diversity. When the machine hours becomes the basis for allocation of overhead, scented would received 26% of overhead and regular would receive 74% of overhead but scented consumes 70% of non machine related overhead. This would lead to under costing of scented and over costing or regular.         

Requirement 3: Calculate activity rates as follows

Activity rate                            = Total activity cost ÷ Activity driver

Inspecting products                = $4,900 ÷ (140 hours + 60 hours)

                                                = 24.5 per inspection hour

Setting up equipment              = $4,770 ÷ (60 hours + 30 hours)

                                                = 53 per setup hour

Machining                               = $6,360 ÷ (200 hours + 560 hours)

                                                = 8.37 per machine hour

Moving Materials                    = $1,440 ÷ (235 hours + 65 hours)

                                                = 4.80 per move

Requirement 4: Compute number of inspection hours as follows

Inspection hours                      = Cost ÷ Rate

                                                = $4,900 ÷ $20 per inspection hour

                                                = 245 inspection hours.