ALPHA Company makes three types of sunglasses: Nerds, Stars, and Fashions. ALPHA
ID: 2527302 • Letter: A
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
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
$250,000
Explanation / Answer
Ans 2: Calculation of Activity cost rate for each activity:
Equipment depreciation
and maintenance
EXPLANATION: ACTIVITY COST RATE IS CALCULATED USING THIS FORMULA
=COST/COST DRIVER UNITS
3.CALCULATION OF COST OF THREE PRODUCTS USING ABC ANALYSIS METHOD:
DIRECT LABOUR COST
(DIRECT LABOUR HOUR*DIRECT LABOUR HOUR RATE PER HOUR)
1500$
(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)
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 USEDEquipment 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 SHIPMENTRelated Questions
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