Question

ALPHA Company makes three types of sunglasses: Nerds, Stars, and Fashions. ALPHA Company presently allocates overhead to products using a rate based on direct labor-hours. A consultant recommended that ALPHA switch to activity-based costing. Management decided to give ABC a try and identified the following activities, cost drivers, and costs for a typical year for each activity center. Use this information to compute the overhead rates for each cost driver.

Activity	Recommended cost driver	Costs	Cost driver units
Production setup	Production runs	$ 30,000	100
Order processing	Orders	50,000	200
Materials handling	Pounds of materials used	20,000	8,000
Equipment depreciation and maintenance	Machine-hours	60,000	10,000
Quality management	Inspections	50,000	40
Packing and shipping	Units shipped	40,000	20,000
Total overhead		$250,000

In addition, there are 2,500 direct labor-hours in a typical year.

Assume the following activities occurred in February of 2011:

	Nerds	Stars	Fashions
Units produced	1,000	500	400
Direct materials costs	$4,000	$2,500	$2,000
Direct labor-hours	100	100	89
Orders	8	8	4
Production runs	2	4	8
Pounds of material	400	200	200
Machine-hours	500	300	300
Inspections	2	2	2
Units shipped	1,000	500	300

Direct labor costs are $15 per hour.

Requirement:

2. Calculate the activity cost rates for (each activity center.

3. Cost out the three products using an activity-based costing system.

Answer 1