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Activity-Based And Department Rate Product Costing and Product Cost Distortions

Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows:

Indirect labor	$507,000
Cutting Department	156,000
Finishing Department	192,000
Total	$855,000

The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:

Activity		Budgeted Activity Cost				Activity Base
Production control			$237,000			Number of production runs
Materials handling			270,000			Number of moves
Total			$507,000

The activity-base usage quantities and units produced for the two products follow:

		Number of Production Runs				Number of Moves				Direct Labor Hours-Cutting				Direct Labor Hours-Finishing				Units Produced
Snowboards			430				5,000				4,000				2,000				6,000
Skis			70				2,500				2,000				4,000				6,000
Total			500				7,500				6,000				6,000				12,000

Required:

1. Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is $315,000 and $540,000 for the Cutting and Finishing departments, respectively. Round per unit amounts to the nearest whole cent.

Department	Production Department Rate
Cutting Department	$ per direct labor hour
Finishing Department	$ per direct labor hour

2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). Round per unit amounts to the nearest whole cent.

Product	Total Factory Overhead	Factory Overhead Per Unit
Snowboards	$	$
Skis	$	$

3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. Round per unit amounts to the nearest whole cent.

Activity	Activity Rate
Production Control	$ per prod. run
Materials Handling	$ per move
Cutting Department	$ per dlh
Finishing Department	$ per dlh

4. Determine the total and per-unit cost assigned to each product under activity-based costing. Round the per unit amounts to the nearest whole cent.

Product	Total Activity Cost	Activity Cost Per Unit
Snowboards	$	$
Skis	$	$

Activity-Based Product Costing

Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) 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:

Activity		Activity Cost Pool
Production			$259,200
Setup			55,000
Materials handling			9,750
Inspection			60,000
Product engineering			123,200
	Total		$507,150

The activity bases identified for each activity are as follows:

Activity	Activity Base
Production	Machine hours
Setup	Number of setups
Materials handling	Number of parts
Inspection	Number of inspection hours
Product engineering	Number of engineering hours

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

		Machine Hours			Number of Setups			Number of Parts			Number of Inspection Hours			Number of Engineering Hours			Units
Alpha		1,440			75			65			400			125			1,800
Beta		1,080			165			80			300			175			1,350
Omega		720			310			180			500			140			900
	Total	3,240			550			325			1,200			440			4,050

Each product requires 48 minutes per unit of machine time.

Required:

If required, round all per unit amounts to the nearest cent.

1. Determine the activity rate for each activity.

Production	$ per machine hour
Setup	$ per setup
Materials handling	$ per part
Inspection	$ per inspection hour
Product engineering	$ per engineering hour

2. Determine the total and per-unit activity cost for all three products.

	Total Activity Cost	Activity Cost Per Unit
Alpha	$	$
Beta
Omega

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