Question

EyeGuard Equipment Inc. (EEI) manufactures protective eyewear for use in commercial and home applications. The product is also used by hunters, home woodworking hobbyists, and in other applications. The firm has two main product lines—the highest-quality product is called Safe-T, and a low-cost, value version is called Safe-V. Information on the factory conversion costs for EEI is as follows: Factory Costs Salaries $ 844,000 Supplies 144,000 Factory expense 544,000 $ 1,532,000 EEI uses ABC to determine the unit costs of its products. The firm uses resource consumption cost drivers based on rough estimates of the amount that each activity consumes, as shown below. EEI has four activities: job setup, assembly, inspecting and finishing, and packaging. Setup Assembly Inspecting and Finishing Packaging Total Salaries 15 % 55 % 20 % 10 % 100 % Supplies 20 60 20 100 Factory expense 80 20 100 The activity cost drivers for the two products are summarized below. Activities Activity Driver Setup Batch Assembly Units Inspect and finishing Finishing hours Packaging Packing hours Safe-V Safe-T Batches 190 540 Units 54,000 66,000 Finishing hours, per unit 0.20 0.30 Packaging hours, per unit 0.10 0.15 Materials per unit $ 3.50 $ 6 Required: 1. Determine the amount of the cost pool for each of the four activities. 2. Determine the activity-driver rates for assigning factory costs to the two products. 3. Determine the activity-based unit cost for each of the products.

Answer 1

Solution 1:

Determination of amount of cost pool for each of four activities
Particulars	Total Cost	Job Setup		Assembly		Inspecting and finishing		Packaging
		%	Amount	%	Amount	%	Amount	%	Amount
Salaries	$844,000.00	15%	$126,600.00	55%	$464,200.00	20%	$168,800.00	10%	$84,400.00
Supplies	$144,000.00	20%	$28,800.00	60%	$86,400.00	20%	$28,800.00	0%	$0.00
Factory Expense	$544,000.00	80%	$435,200.00	20%	$108,800.00	0%	$0.00	0%	$0.00
Total	$1,532,000.00		$590,600.00		$659,400.00		$197,600.00		$84,400.00

Solution 2:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
					Job Setup	$590,600.00	Nos of batches	730	$809.04
Assembly	$659,400.00	Nos of units	120000	$5.50
Inspecting and finishing	$197,600.00	Finishing hours	30600	$6.46
Packaging	$84,400.00	Packing hours	15300	$5.52
Total	$1,532,000.00

Solution 3:

Computation of conversion cost assigned to product - Activity Based Costing
Activity	Cost	Cost Driver	Qty of cost driver	Allocation rate	Safe V		Safe T
					Allocation Qty	Allocated Overhead	Allocation Qty	Allocated Overhead
Job Setup	$590,600.00	Nos of batches	730	$809.04	190	$153,718	540	$436,882
Assembly	$659,400.00	Nos of units	120000	$5.50	54000	$297,000	66000	$363,000
Inspecting and finishing	$197,600.00	Finishing hours	30600	$6.46	10800	$69,768	19800	$127,908
Packaging	$84,400.00	Packing hours	15300	$5.52	5400	$29,808	9900	$54,648
Total	$1,532,000.00					$550,294		$982,438

Computation of activity based unit cost
Particulars	Safe V	Safe T
Material cost	$189,000	$396,000
Conversion cost	$550,294	$982,438
Total cost	$739,294	$1,378,438
Nos of units	54000	66000
Cost per unit	$13.69	$20.89