Question

Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:

1	Activity	Activity Cost Pool
2	Production	$242,089.00
3	Setup	88,425.00
4	Material handling	9,253.00
5	Inspection	49,623.00
6	Product engineering	167,990.00
7	Total	$557,380.00

The activity bases identified for each activity are as follows:

Activity	Activity Base
Production	Machine hours
Setup	Number of setups
Material handling	Number of parts
Inspection	Number of inspection hours
Product engineering	Number of engineering hours

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

	Machine	Number of	Number of	Number of	Number of
	Hours	Setups	Parts	Inspection Hours	Engineering Hours	Units
Alpha	984	57	84	441	125	1,366
Beta	847	126	158	284	191	991
Omega	390	210	245	248	219	475
Total	2,221	393	487	973	535	2,832

Each product requires 40 minutes per unit of machine time.

Required:

Complete the Activity Tables for Alpha, Beta and Omega. 1. Determine the activity rate for each activity.* 2. Use the activity rates in (1) to determine the total and per-unit activity costs associated with all three products.* 3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit? *If required, round all per-unit amounts to the nearest cent.

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Complete the Activity Table for Alpha. 1. Determine the activity rate for each activity. Enter these rates in the Activity Rate columns.* 2. Use the activity rates in (1) to determine the total and per-unit activity costs associated with Alpha.* *If required, round all per-unit amounts to the nearest cent.

	Alpha
Activity	Activity-
	Base		Activity		Activity
	Usage	X	Rate	=	Cost
Production
Setup
Material handling
Inspection
Product Engineering
Total activity cost
Number of units
Activity cost per unit

Complete the Activity Table for Beta. 1. Determine the activity rate for each activity. Enter these rates in the Activity Rate columns.* 2. Use the activity rates in (1) to determine the total and per-unit activity costs associated with Beta.* *If required, round all per-unit amounts to the nearest cent.

	Beta
Activity	Activity-
	Base		Activity		Activity
	Usage	X	Rate	=	Cost
Production
Setup
Material handling
Inspection
Product Engineering
Total activity cost
Number of units
Activity cost per unit

Complete the Activity Table for Omega. 1. Determine the activity rate for each activity. Enter these rates in the Activity Rate columns.* 2. Use the activity rates in (1) to determine the total and per-unit activity costs associated with Omega.* *If required, round all per-unit amounts to the nearest cent.

	Omega
Activity	Activity-
	Base		Activity		Activity
	Usage	X	Rate	=	Cost
Production
Setup
Material handling
Inspection
Product Engineering
Total activity cost
Number of units
Activity cost per unit

3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?

The difference is due to product cost distortions.

The difference is because the products consume many activities in ratios different from the volume.

The difference is due to machine inefficiencies.

Answer 1

1.activity rate= Total overhead/Total activity
	Activity	Activity Cost Pool	Total Activity	Activity Rate
2	Production	$242,089.00	2,221	$109.00
3	Setup	88,425.00	393	$225.00
4	Material handling	9,253.00	487	$19.00
5	Inspection	49,623.00	973	$51.00
6	Product engineering	167,990.00	535	$314.00
7	Total	$557,380.00
2. Alpha
	Alpha
Activity	Activity-
	Base		Activity		Activity
	Usage	X	Rate	=	Cost
Production	984		$109.00		$107,256.00
Setup	57		$225.00		$12,825.00
Material handling	84		$19.00		$1,596.00
Inspection	441		$51.00		$22,491.00
Product Engineering	125		$314.00		$39,250.00
Total activity cost					$183,418.00
Number of units					1,366
Activity cost per unit					$134.27
Beta
	Beta
Activity	Activity-
	Base		Activity		Activity
	Usage	X	Rate	=	Cost
Production	847		$109.00		$92,323.00
Setup	126		$225.00		$28,350.00
Material handling	158		$19.00		$3,002.00
Inspection	284		$51.00		$14,484.00
Product Engineering	191		$314.00		$59,974.00
Total activity cost					$198,133.00
Number of units					991
Activity cost per unit					$199.93
Omega
	Omega
Activity	Activity-
	Base		Activity		Activity
	Usage	X	Rate	=	Cost
Production	390		$109.00		$42,510.00
Setup	210		$225.00		$47,250.00
Material handling	245		$19.00		$4,655.00
Inspection	248		$51.00		$12,648.00
Product Engineering	219		$314.00		$68,766.00
Total activity cost					$175,829.00
Number of units					475
Activity cost per unit					$370.17

3.

The difference is because the products consume many activities in ratios different from the volume.