Question

In: Accounting

Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) in...

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.

-------------------------

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.

Solutions

Expert Solution

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.


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