Question

Activity based costing

Apply the Concepts

Scenario IV: Goodmark Company produces two types of birthday cards: scented and regular. Expected product data for the coming year are given below. Overhead costs are identified by activity.

	Scented Cards	Regular Cards	Total
Units produced	20,000	200,000	-
Prime costs	$160,000	$1,500,000	$1,660,000
Direct labor hours	20,000	160,000	180,000
Number of setups	60	40	100
Machine hours	10,000	80,000	90,000
Inspection hours	2,000	16,000	18,000
Number of moves	180	120	300

Overhead costs:

Setting up equipment	$240,000
Moving materials	120,000
Machining	200,000
Inspecting products	160,000

Required:

1.	Answer the following questions:
a.	Calculate the activity consumption ratios for Scented cards (round to two decimal places).
	Setups: Moving materials: Machining: Inspection:
b.	If only one rate based on direct labor hours were used to assign overhead, Scented Cards would receive about  percent of the total overhead. Upon comparing this overhead assignment with the activity consumption ratios calculated in part a, it is clear that a plantwide rate would the activity-based cost assignments.
2.	Calculate the four activity rates (round to the nearest cent).
	Setups: per setup Moving materials: per move Machining: per machine hour Inspection: per inspection hour
3.	Calculate the total unit costs using activity rates to assign overhead (round to the nearest cent).
	Scented: $ Regular: $

Answer 1

Solution 1-a

Computation of activity consumption ratios for Scented cards
	Consumption Ratio
Setups	60/100	60.00%
Moving Materials	180/300	60.00%
Machining	10000/90000	11.11%
Inspection	2000/18000	11.11%

Solution 1-b:

If one rate based on Direct Labor hours is used, then Scented Overhead will Receive = 20,000 / 180,000 = 11.11% of Total Overhead.

Upon comparing this overhead assignment with the activity consumption ratios calculated in part a, it is clear that a plantwide rate would understate the activity-based cost assignments.

Solution 2:

Comptation of Activity rates
Activity	Overhead	Cost Driver Quantity		Activity Rate
Setups	$2,40,000	100	Setups	$2,400.00	per Setup
Moving Material	$1,20,000	300	moves	$400.00	per move
Machining	$2,00,000	90000	Machine hours	$2.22	per machine hr
Inspection	$1,60,000	18000	inspection hours	$8.89	per inspection hr
Total	$7,20,000

Solution 3:

Computation of Overhead allocated
		Scented Cards		Regular Cards
Activity	Activity Rate	Cost Driver	Overhead Allocated	Cost Driver	Overhead Allocated
Setups	$2,400.00	60	$1,44,000	40	$96,000
Moving Material	$400.00	180	$72,000	120	$48,000
Machining	$2.22	10000	$22,222	80000	$1,77,778
Inspection	$8.89	2000	$17,778	16000	$1,42,222
Total			$2,56,000		$4,64,000

Computatioon of Total Units Cost
	Scented Cards	Regular Cards
Prime Cost	$1,60,000.00	$15,00,000.00
Overhead Costs	$2,56,000.00	$4,64,000.00
Total Costs	$4,16,000.00	$19,64,000.00
No. of units	20000	200000
Cost per unit	$20.80	$9.82