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Activity$-$based costing and product cost distortion

Crenshaw Inc. is considering a change to activity$-$based product costing. The company produces two products, cell phones and tablet PCs$,$ in a single production department. The production department is

estimated to require $4,000$ direct labor hours. The total indirect labor is budgeted to be $$576,000.$

Time records from indirect labor employees revealed that they spent $40\%$ of their time setting up production runs and $60\%$ of their time supporting actual production.

The following information about cell phones and tablet PCs was determined from the corporate records:

If required, round your answers to the nearest cent.

a$.$ Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.

Cell phones $

per unit

Tablet PCs

per unit

b$.$ Determine the budgeted activity costs and activity rates for the indirect labor under activity$-$based costing. Assume two activities$-$one for setup and the other for production support.

Budgeted Activity Cost

Activity Rate

c$.$ Determine the activity cost per unit for indirect labor allocated to each product under activity$-$based costing.

Cell phones :

per unit

Tablet PCs

per unit

d$.$ Why are the per$-$unit allocated costs in $($a$)$ different from the per$-$unit activity cost assigned to the products in $($c$)?$

The per$-$unit indirect labor costs in $($a$)$ are distorted because

is consumed by the products in a different ratio from the direct labor. The

costing method results in

the product with the

direct labor hours

number of setups receiving a larger portion of the setup activity cost. The

allocates overhead only on the basis of direct labor hours. Since the

equal for each product, the allocated indirect labor will also

equal.

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