Question

Cornerstone Exercise 4.5 (Algorithmic) Activity-Based Product Costing Roberts Company produces two weed eaters: basic and advanced. The company has four activities: machining, engineering, receiving, and inspection. Information on these activities and their drivers is given below. Basic      Advanced      Total Units produced         150,000         450,000         ------ Prime costs         $10,500,000         $52,200,000         $62,700,000 Machine hours         150,000         750,000         900,000 Engineering hours         400         3,600         4,000 Receiving orders         200         600         800 Inspection hours         800         1,600         2,400         Overhead costs:         Machining         $13,500,000 Engineering         1,920,000 Receiving         216,000 Inspecting products         480,000 Required: 1. Calculate the four activity rates. Machining rate $  per machine hour Engineering rate $  per hour Receiving rate $  per order Inspecting rate $  per hour 2. Calculate the unit costs using activity rates. Round your answers to the nearest cent. Unit cost Basic $  per unit Advanced $  per unit Calculate the overhead cost per unit. Round your answers to the nearest cent. Overhead Cost Basic $  per unit Advanced $  per unit 3. What if consumption ratios instead of activity rates were used to assigned costs? Show the cost assignment for the inspection activity. Cost assignment Basic $ Advanced $

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1. Machining rate: Overhead costs ÷ Total machine hours. The other three activity rates are calculated the same way using each activity's Overhead costs and totals.

2. Use the calculations from Requirement 1 to calculate the unit costs and also calculate OH cost per unit. Example of Total cost: Activity rate (above) × Basic OH costs and also Activity rate × Advanced OH costs. Example of OH costs per units: Total manufacturing costs÷ Units of production = Unit Cost (for Basic and Advanced).

3. Calculate unit costs using consumption ratios. Compare to activity rate unit costs. To assign inspection cost use the inspection hrs. for basic/advanced ÷ total inspection hrs. for both and give a conclusion.

Answer 1

• All working forms part of the answer
• Requirement 1

	Overhead cost	Total cost drivers	Activity Rates
Machining	$                135,00,000.00	900000	$                           15.00	per machine hour
Engineering	$                  19,20,000.00	4000	$                         480.00	per hour
Receiving	$                    2,16,000.00	800	$                         270.00	per order
Inspection Products	$                    4,80,000.00	2400	$                         200.00	per hour
Total	$                161,16,000.00

• Requirement 2

Basic’s Overhead cost per unit

	Activity rate	No. of cost driver	Overhead cost allocated
Machining	$                                15.00	150000	$                      22,50,000.00
Engineering	$                              480.00	400	$                        1,92,000.00
Receiving	$                              270.00	200	$                            54,000.00
Inspection Products	$                              200.00	800	$                        1,60,000.00
		Total Overhead cost allocated	$                      26,56,000.00
		Total Units	$                        1,50,000.00
		Overhead cost per unit	$                                    17.71

Advanced Overhead cost per unit

	Activity rate	No. of cost driver	Overhead cost allocated
Machining	$                                15.00	750000	$                   112,50,000.00
Engineering	$                              480.00	3600	$                      17,28,000.00
Receiving	$                              270.00	600	$                        1,62,000.00
Inspection Products	$                              200.00	1600	$                        3,20,000.00
		Total Overhead cost allocated	$                   134,60,000.00
		Total Units	$                        4,50,000.00
		Overhead cost per unit	$                                    29.91

Product Unit Cost

	Basic	Advanced
Prime Costs	$                105,00,000.00	$                       522,00,000.00
Total Units	150000	450000
Prime cost per unit	$                                70.00	$                                     116.00
Overhead cost per unit	$                                17.71	$                                       29.91
Total Unit Cost	$                                87.71	$                                     145.91

• Requirement 3

Working

Total Overhead cost	$                161,16,000.00
Total Prime cost	$                627,00,000.00
Overhead cost per Prime cost $ (Consumption)	$                                   0.26
Basic' Prime cost	$                105,00,000.00
Basic's Overhead cost allocated	$                  27,30,000.00
Overhead cost per unit	$                                18.20
Advanced Prime Costs	$                522,00,000.00
Advanced's Overhead cost allocated	$                135,72,000.00
Overhead cost per unit	$                                30.16

	Basic	Advanced
Prime cost per unit	$                                70.00	$                                     116.00
Overhead cost per unit	$                                18.20	$                                       30.16
Total Unit Cost	$                                88.20	$                                     146.16