Question

Digital Storage Concept Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 3,750 direct labor hours. The total indirect labor is budgeted to be $375,000.

Time records from indirect labor employees revealed that they spent 40% of their time setting up production runs and 60% of their time supporting actual production.

The following information about cell phones and tablet PCs was determined from the corporate records:

	Number of Setups	Direct Labor Hours	Units
Cell phones	600	1,875	93,750
Tablet PCs	1,400	1,875	93,750
Total	2,000	3,750	187,500

	Required:
	a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base. Complete the Activity Tables for cell phones and tablets: b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.* c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.* d. Why are the per-unit allocated costs in (a) different from the per-unit activity cost assigned to the products in (c)?
	* If required, round all per-unit answers to the nearest cent.

Answer 1

Solution a:

Total indirect labor cost = $375,000

Total direct labor hours = 3750 hours

Single plantwide factory overhead rate = $375,000 / 3750 = $100 per hour

Indirect labor cost allocated to Cell phones = 1875 * $100 = $187,500

Indirect labor cost allocated to Tablet PCs = 1875 * $100 = $187,500

Indirect labor cost per unit allocated to cell phones = $187,500 / 93750 = $2

Indirect labor cost per unit allocated to Tablet PC = $187,500 / 93750 = $2

Solution b:

Computation of activity rates and overhead assigned to product - Activity Based Costing
Activity	Cost	Cost Driver	Qty of cost driver	Allocation rate	Cellphone		Tablet PC
					Allocation Qty	Allocated Overhead	Allocation Qty	Allocated Overhead
Setup	$150,000.00	Nos of Setups	2000	$75.00	600	$45,000.00	1400	$105,000.00
Production Support	$225,000.00	Direct labor hours	3750	$60.00	1875	$112,500.00	1875	$112,500.00
Total	$375,000.00					$157,500.00		$217,500.00

Solution c:

Determination of activity cost per unit for indirect labor allocated to each product
Activity	Cellphone			Tablet PC
	Allocated Cost	Nos of Unit	Activity cost per unit	Allocated Cost	Nos of Unit	Activity cost per unit
Setup	$45,000.00	93750	$0.48	$105,000.00	93750	$1.12
Production Support	$112,500.00	93750	$1.20	$112,500.00	93750	$1.20
Total	$157,500.00	93750	$1.68	$217,500.00	93750	$2.32

Solution d:

Per unit allocated cost in (a) is different from per unit activity cost assigned in product c because under part a overhead was allocated on the basis of single plant wide overhead rate based on direct labor hours and proportion of direct labor hours used under both products are equal. However in part c overhead cost was allocated by using two different cost driver and proportion of use of cost driver is also not equal among the products. That's why per unit allocated cost in (a) different from per unit activity cost assigned to product in (c)