Question

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:

1	Activity	Activity Cost Pool
2	Production	$251,598.00
3	Setup	92,035.00
4	Material handling	10,736.00
5	Inspection	49,833.00
6	Product engineering	136,230.00
7	Total	$540,432.00

The activity bases identified for each activity are as follows:

Activity	Activity Base
Production	Machine hours
Setup	Number of setups
Material 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	Number of	Number of	Number of	Number of
	Hours	Setups	Parts	Inspection Hours	Engineering Hours	Units
Alpha	970	63	84	489	123	1,354
Beta	802	123	138	272	170	1,044
Omega	435	209	266	256	185	452
Total	2,207	395	488	1,017	478	2,850

Each product requires 40 minutes per unit of machine time.

Required:

Complete the Activity Tables for Alpha, Beta and Omega. 1. Determine the activity rate for each activity.* 2. Use the activity rates in (1) to determine the total and per-unit activity costs associated with 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? *If required, round all per-unit amounts to the nearest cent.

Answer 1

Answer

• All working forms part of the answer
• Requirement 1: Calculation of activity rates

Activity	Expected Costs	Expected Activity		Activity Rate
Production	$      251,598.00	2,207	no of machine hours	$                 114.00	per no of machine hours
Setup	$         92,035.00	395	no. of setups	$                 233.00	per no. of setups
Material Handling	$         10,736.00	488	no of parts	$                   22.00	per no of parts
Inspection	$         49,833.00	1,017	inspection hours	$                   49.00	per inspection hours
Product engineering	$      136,230.00	478	engineering hours	$                 285.00	per engineering hours
TOTAL	$      540,432.00

• Requirement 2

Overhead allocated total and per unit calculation for each product separately

Alpha
Activity	Activity Base Usage		Activity Rate		Activity Cost
Production	970	no of machine hours	$                                          114.00	no of machine hours	$        110,580.00
Setup	63	no. of setups	$                                          233.00	no. of setups	$           14,679.00
Material Handling	84	no of parts	$                                            22.00	no of parts	$             1,848.00
Inspection	489	inspection hours	$                                            49.00	inspection hours	$           23,961.00
Product engineering	123	engineering hours	$                                          285.00	engineering hours	$           35,055.00
Total Activity Cost					$        186,123.00
No. of units					1,354
Activity Cost per unit					$                 137.46
BETA
Activity	Activity Base Usage		Activity Rate		Activity Cost
Production	802	no of machine hours	$                                          114.00	no of machine hours	$           91,428.00
Setup	123	no. of setups	$                                          233.00	no. of setups	$           28,659.00
Material Handling	138	no of parts	$                                            22.00	no of parts	$             3,036.00
Inspection	272	inspection hours	$                                            49.00	inspection hours	$           13,328.00
Product engineering	170	engineering hours	$                                          285.00	engineering hours	$           48,450.00
Total Activity Cost					$        184,901.00
No. of units					1,044
Activity Cost per unit					$                 177.11
OMEGA
Activity	Activity Base Usage		Activity Rate		Activity Cost
Production	435	no of machine hours	114	no of machine hours	$           49,590.00
Setup	209	no. of setups	233	no. of setups	$           48,697.00
Material Handling	266	no of parts	22	no of parts	$             5,852.00
Inspection	256	inspection hours	49	inspection hours	$           12,544.00
Product engineering	185	engineering hours	285	engineering hours	$           52,725.00
Total Activity Cost					$        169,408.00
No. of units					452
Activity Cost per unit					$                 374.80

• Requirement 3

Activity unit cost is different even though same machine hours per unit are used BECAUSE number of units are different and so number of machine hours used in total are also different. Moreover, the overhead are allocated here not only on the basis of machine hours but also by using other cost drivers.