w Part / Aetivity-Based Accounting 3. Applied overhead (by product): Deluxe: ($6.00 X 2,000) + ($1.33 X 2,000) Regular: ($6.00 X 18,000) + ($1.33 x 43,000) 14,660 $165,190 4, Unit cost (rounded to the nearest cent): Deluxe: ($40,000 + $14,660)/3,000 Regular: ($300,000 + $165,190)/50,000 3, Activity-Based Rates Nabors Company produces two types of stereo units: deluxe and regular, Activity data follow: Product-Costing Data Activity Usage Measures Deluxe Regular __Total Units produced per year 5,000 50,000 55,000 Prime costs $39,000 $369,000 $408,000 Direct labor hours 5,000 45,000 50,000 Machine hours 10,000 90,000 100,000 Production runs 10 5 15 Number of moves 120 60 180 Activity Cost Data (Overhead Activities) Activity Activity Cost Setups $ 60,000 Material handling 30,000 Power 50,000 Testing 40,000 Total ‘580,000 Required 1. Calculate the consumption ratios for each activity 2. Group activities based on the consumption ratios and activity level 3. Calculate a rate for each pooled group of activities. 4, Using the pool rates, calculate unit product costs. Solution 1. Consumption ratios: Overhead Activity jux gular Activity Driver Setups 0.67" 033* Production runs Material handling 0.67 0.33" Number of moves Power 0.10° 0.90 Machine hours ‘Testing 0.108 0.90% Direct labor hours 10/15 (deluxe) an 5/15 (egula) 120/180 (deluxe) ad 6180 (eguls) §10;200/100,.000 (delat) ad 90,000/200,000 (epae) 45,009/50 000 (dene) and 45 000/50,000 (celaChapter 4 / Activity-Based Product Costing [ 148 2, Batch-level: setups and material handling Unitlevel: power and testing 3. _Batch-Level Pool Unit-Level Pool Setups $60,000 Power $50,000 Material handling _30,000 “Testing 40,000 Total $90,000 Total $90,000 Runs = 15 Machine hours 100,000 Pool rate $6,000 perrun Pool rate $0.90 per Tmachine hour 4, Unit costs; ativity-based costing Deluxe Regular Prime costs 8 39,000 $369,000 ‘Overhead costs: Batch-level pool (56,000 * 10) 60,000 (56,000 x 5) 30,000 Unit level pool: (50.90 x 10,000) 9,000 (50.90 x 90,000) 81,000 Total manufacturing costs $108,000 $480,000 Units produced =_5,000 + 50,000 Unit cost (total costs/units) £21.60 £3.60 Questions for Writing and Discussion 1. Explain why knowing the unit cost of product 9. Explain how undercosting low-volume products or service is important and overcosting high-volume products can affect 2, What is cost measurement! Cost assignment? the competitive position of a firm. What is the difference between the two? 10. What are non-unitlevel overhead activities? Non- 3. Explain why an actual overhead rate is rarely unit-level cost drivers? Give some examples used for product costing. U1, What is meant by “product diversity"? 4, Describe the two-stage process associated with 12, What is an overhead consumption ratio? plantwide overhead rates 13, Explain how departmental overhead rates can 5, Describe the two-stage process for departmental produce product costs that are more distorted overhead rates. than those computed using a plantwide rate. 6, Explain why departmental rates might be chosen’ 14, Overhead costs are the source of product cost cover plantwide rates. distortions. Do you agree or disagree? Explain. 7. Explain how a plantwide overhead rate, using a 15, What is activity-based product costing? tunitlevel cost driver, can produce distorted prod- 16. What is an activity dictionary? uct costs. In your answer, identify two major fac- 17, What is the difference between primary and sec- tors that impair the ability of plantwide rates to ondary activities? assign cost accurately 18, Explain how costs are assigned to activities, 8, Explain how low-volume products can be under- 19, What are unit-level activities? Batch-level activities? costed and high-volume products overcosted if Product-level activities? Facility level activities? only unit-level cost drivers are used to assign. 20. Explain how the number of activity rates can be overhead costs, reduced in an ABC system while maintaining a reasonable level of accuracy.