Activity-Based Product Costing Alabama Manufacturing Company is a diversified ma
ID: 2574771 • Letter: A
Question
Activity-Based Product Costing
Alabama Manufacturing Company is a diversified manufacturer that manufactures three products (M5, Z4, and I8) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:
The activity bases identified for each activity are as follows:
The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:
Each product requires 0.9 machine hour per unit.
Required:
If required, round all per unit amounts to the nearest cent.
1. Determine the activity rate for each activity.
2. Determine the total and per-unit activity cost for all three products.
3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?
The unit costs are different because the products consume many activities in ratios different from the .
Activity Activity Cost Pool Production $356,400 Setup 132,300 Material handling 65,700 Inspection 151,700 Product Engineering 66,000 Total $772,100Explanation / Answer
Answer 1. Activity Overhead Cost Driver Quantity Activity Rate Production 356,400 6,600 mach Hrs 54.00 per mach hr Setup 132,300 300 no. of setups 441.00 per Setup Material Handling 65,700 900 no. of moves 73.00 per move Inspection 151,700 4,100 no. of customer orders 37.00 per customer Product Engineering 66,000 500 no. of test runs 132.00 per test run Total 772,100 Answer 2. Assigning Overhead Cost to Product Using ABC Method Activity Based Overhead Rate M5 Z4 I8 Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Cost Driver Incurred OH Allocated Production 54.00 per Setup 2,900 mach Hrs 156,600 1,850 mach Hrs 99,900 1,850 mach Hrs 99,900 Setup 441.00 per move 80 no. of setups 35,280 110 no. of setups 48,510 110 no. of setups 48,510 Material Handling 73.00 per mach hr 180 no. of moves 13,140 270 no. of moves 19,710 450 no. of moves 32,850 Inspection 37.00 per customer 820 no. of customer orders 30,340 2,260 no. of customer orders 83,620 1,020 no. of customer orders 37,740 Product Engineering 132.00 per test run 50 no. of test runs 6,600 320 no. of test runs 42,240 130 no. of test runs 17,160 Total Overhead Cost 241,960 293,980 236,160 Product Total Activity Cost No. of Units Activity Cost per Unit M5 241,960 7,250 33.37 Z4 293,980 4,625 63.56 I8 236,160 4,625 51.06 772,100 Answer 3. The unit costs are different because the products consume many activities in ratios different from the machine time per unit.
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