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         130,000         390,000         ------ Prime costs         $9,360,000         $39,780,000         $49,140,000 Machine hours         130,000         650,000         780,000 Engineering hours         400         3,600         4,000 Receiving orders         400         1,200         1,600 Inspection hours         900         1,800         2,700         Overhead costs:         Machining         $7,800,000 Engineering         1,680,000 Receiving         512,000 Inspecting products         351,000 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 $

Answer 1

1) Calculation of activity rate
Activity	Cost (A)	Cost driver (B)	activity rate (A)/(B)
Machine rate	7800000	780000	10	Per machine hr
Engineering rate	1680000	4000	420	per engineering hr
Receiving rate	512000	1600	320	per order
inspecting rate	351000	2700	130	per inspection hr
2) Calculation of unit cost
Unit cost	Basic	Advanced
prime cost	9360000	39780000
Machine (130000*10), (650000*10)	1300000	6500000
engineering (400*420), (3600*420)	168000	1512000
receiving (400*320), (1200*320)	128000	384000
inspection (900*130), (1800*130)	117000	234000
total cost	11073000	48410000
total unit	130000	390000
Unit cost	85.18	124.13
3) Calculation of overhead cost per unit
Particulars	Basic	advanced
total cost as calculated above	11073000	48410000
less: prime cost	9360000	39780000
overhead cost	1713000	8630000
total unit	130000	390000
overhead cost per unit	13.18	22.13
4) Calculation of consumption ratio
Particulars	Basic	advanced	total
inspecting products	900	1800	2700
Consumption ratio (900/2700),(1800/2700)	0.33	0.67
overhead assigned (351000*0.33), (351000*0.67)	117000	234000