Question

Activity-Based Costing

Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activities—production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity bases for these activities:

Activity	Activity Cost		Activity Base
Production setup	$ 67,500		Number of setups
Procurement	126,000		Number of purchase orders (PO)
Quality control	156,000		Number of inspections
Materials management	147,000		Number of components
Total	$496,500

The activity-base usage quantities for each product are as follows:

	Setups		Purchase     Orders		Inspections		Components		Unit Volume
Custom	200		1,100		2,200		400		2,000
Standard	300		100		200		300		2,000
Total	500		1,200		2,400		700		4,000

a. Determine an activity rate for each activity.

Activity Rates	Production Setup		Procurement		Quality Control		Materials Management
Activity cost	$		$		$		$
÷ Activity base
Activity rate	$	/setup	$	/PO	$	/inspection	$	/component

b. Assign activity costs to each product and determine the unit activity cost, using the activity rates from part (a). Round unit costs to the nearest cent.

	Custom		Standard
Setups Total	$		$
Purchase Orders Total
Inspections Total
Components Total
Total product cost	$		$
Unit volume
Unit cost	$		$

c. Assume that each product required one direct labor hour per unit. Determine the per-unit cost if factory overhead is allocated on the basis of direct labor hours. Round your answer to the nearest cent.
$per unit

d. The custom product will consume   materials management activities than will the standard product.

Answer 1

a.Activity rate
Activity Rates	Production Setup		Procurement		Quality Control		Materials Management
Activity cost	$67,500		126,000		156,000		147,000
÷ Activity base	500		1,200		2,400		700
Activity rate	$135	/setup	$105	/PO	$65	/inspection	$210	/component
b.Activity cost = Activity Rate*Driver Consumption
	Custom	Standard
Setups Total	$27,000	$40,500	$
Purchase Orders Total	$115,500	$10,500
Inspections Total	$143,000	$13,000
Components Total	$84,000	$63,000
Total product cost	$369,500	$127,000	$
Unit volume	2000	2000
Unit cost	$184.75	$63.50	$
d.More than standard product