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:

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

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

Note : the Answers should be computerized Please

Answer 1

Ans 2: Calculation of Activity cost rate for each activity:

ACTIVITY	RECOMMENDED COST DRVER	COST	COST DRIVER UNITS	ACTIVITY COST RATE
PRODUCTION SETUP	PRODUCTION RUN	30000 $	100	300$ PER PRODUCTION RUN
ORDER PROCESSING	ORDERS	50000$	200	250$ PER ORDER
MATERIAL HANDLING	POUNDS OF MATERIAL USED	20000$	8000	2.5$ PER POUND OF MATERIAL USED
Equipment depreciation and maintenance	MACHINE HOURS	60000$	10000	6$ PER MACHINE HOUR
QUALITY MANAGEMENT	INSPECTIONS	50000$	40	1250$ PER INSPECTION
PACKING AND SHIPPING	UNIT SHIPPED	40000$	20000	2$ PER SHIPMENT

EXPLANATION: ACTIVITY COST RATE IS CALCULATED USING THIS FORMULA

=COST/COST DRIVER UNITS

3.CALCULATION OF COST OF THREE PRODUCTS USING ABC ANALYSIS METHOD:

PARTICULARS	NERDS	STARS	FASHION
UNITS PRODUCED	1000	500	400
DIRECT MATERIAL COST	4000$	2500$	2000$
DIRECT LABOUR COST (DIRECT LABOUR HOUR*DIRECT LABOUR HOUR RATE PER HOUR)	1500$ (100HR*15$)	1500$ (100HR*15$)	1335$ (89HR*15$)
ORDER PROCESSING COST (NO OF ORDER*PER ORDER COST)	2000$ (8ORDER*250$)	2000$ (8ORDER*250$)	1000$ (4ORDER*250$)
PRODUCTION SETUP COST (NO OF PRODUCTION RUN*COST PER PRODUCTION RUN)	600$ (2RUN*300$)	1200$ (4RUN*300$)	2400$
MATERIAL HANDLING COST ( POUND OF MATERIAL*COST PER POUND OF MATERIAL)	1000$ (400 POUND*2.5$ PER POUND)	500$ (200POUND*2.5$PER POUND)	500$ (200 POUND * 2.5$ PER POUND)
EQUIPMENT DEPRICIATION AND MAINTENANCE COST (MACHINE HOUR* COST PER HOUR)	3000$ (500 MACHINE HOUR* ^$ PER MACHINE HOUR)	1800$ (300 MACHINE HOUR* ^$ PER MACHINE HOUR)	1800$ (300 MACHINE HOUR* ^$ PER MACHINE HOUR)
QUALITY MANAGEMENT COST (NO. OF INSPECTION * COST PER INSPECTION)	2500$ (2 INSPECTION * 1250$ PER INSPECTION)	2500$ (2 INSPECTION * 1250$ PER INSPECTION)	2500$ (2 INSPECTION * 1250$ PER INSPECTION)
PACKING AND SHIPPING COST (UNITS SHIPPED*COST PER UNIT SHIPPED)	2000$ (1000 UNITS SHIPPED * 2$ PER UNIT SHIPPED)	1000$ (500 UNITS SHIPPED * 2$ PER UNIT SHIPPED)	600$ (300 UNITS SHIPPED * 2$ PER UNIT SHIPPED)

TOTAL COST

16600 $

13000 $

12135 $