Question

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		130,000		390,000		—
Prime costs		$9,620,000		$41,340,000		$50,960,000
Machine hours		130,000		650,000		780,000
Engineering hours		300		2,700		3,000
Receiving orders		200		600		800
Inspection hours		1,000		2,000		3,000
Overhead costs:
Machining		$7,800,000
Engineering		1,410,000
Receiving		200,000
Inspecting products		390,000

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. If consumption ratios instead of activity rates were used to assign costs instead of activity rates, show the cost assignment for the inspection activity.

	Cost assignment
Basic	$
Advanced	$

Answer 1

Solution 1:

Determination of activity rate for each activity & allocation of overhead
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate
						Machining	$7,800,000.00	Machine hours	780000	$10.00	Per machine hour
Engineering	$1,410,000.00	Engineering hours	3000	$470.00	Per Engineering hour
Receiving	$200,000.00	Receiving Orders	800	$250.00	Per Order
Inspecting Products	$390,000.00	Inspection hours	3000	$130.00	Per Inspection hours
Total	$9,800,000.00

Solution 2:

Allocation of Overhead and computation of overhead cost per unit
Activity	Estimated Overhead Cost	Activity Base	Usage of Activity Base	Activity Rate	Basic		Advanced
					Usage	Allocated Costs	Usage	Allocated Costs
Machining	$7,800,000.00	Machine hours	780000	$10.00	130000	$1,300,000.00	650000	$6,500,000.00
Engineering	$1,410,000.00	Engineering hours	3000	$470.00	300	$141,000.00	2700	$1,269,000.00
Receiving	$200,000.00	Receiving Orders	800	$250.00	200	$50,000.00	600	$150,000.00
Inspecting Products	$390,000.00	Inspection hours	3000	$130.00	1000	$130,000.00	2000	$260,000.00
Total	$9,800,000.00					$1,621,000.00		$8,179,000.00
Nos of units						130000		390000
Overhead cost per unit						$12.47		$20.97

Computation of Unit Product Cost
Particulars	Basic	Advanced
Prime Costs	$9,620,000.00	$41,340,000.00
Nos of units produced	130000	390000
Prime cost per unit	$74.00	$106.00
Overhead cost per unit	$12.47	$20.97
Unit Product Cost	$86.47	$126.97

Solution 3:

Cost assignment for inspection activity using consumption ratios:

Consumption ration between basic and advance for inspection hours = 1000:2000 = 1:2

Inspection cost allocated to Basic = $390,000*1/3 = $130,000

Inspection cost allocated to Advance = $390,000*2/3 = $260,000