Question

EyeGuard Equipment Inc. (EEI) manufactures protective eyewear for use in commercial and home applications. The product is also used by hunters, home woodworking hobbyists, and in other applications. The firm has two main product lines—the highest-quality product is called Safe-T, and a low-cost, value version is called Safe-V. Information on the factory conversion costs for EEI is as follows: Salaries Supplies Factory expense Factory Costs $ 852,000 152,000 552,000 $ 1,556,000 EEl uses ABC to determine the unit costs of its products. The firm uses resource consumption cost drivers based on rough estimates of the amount that each activity consumes, as shown below. EEl has four activities: job setup, assembly, inspecting and finishing, and packaging. Setup Assembly 55% Inspecting and Finishing 20% Packaging 10% Salaries Supplies Factory expense 15% 20 Total 100% 100 100 80 20 The activity cost drivers for the two products are summarized below. Activities Setup Assembly Inspect and finishing Packaging Activity Driver Batch Units Finishing hours Packing hours Batches Units Finishing hours, per unit Packaging hours, per unit Materials per unit Safe-V 270 62,000 0.20 0.10 $ 3.50 Safe-T 620 74,000 0.30 0.15 $ 6

Answer 1

Solution 1:

First stage allocation of cost to activity cost pools
Particulars	Setup		Assembly		Inspecting and finishing		Packaging		Total Cost
	%	Amount	%	Amount	%	Amount	%	Amount
Salaries	15%	$1,27,800	55%	$4,68,600	20%	$1,70,400	10%	$85,200	$8,52,000
Supplies	20%	$30,400	60%	$91,200	20%	$30,400		$0	$1,52,000
factory Expense	0%	$0	80%	$4,41,600	20%	$1,10,400		$0	$5,52,000
Total		$1,58,200		$10,01,400		$3,11,200		$85,200	$15,56,000

Solution 2:

Determination of activity rate for each activity
Activity	Estimated Overhead Cost	Usage of Activity Base	Activity Rate
				Setup	$1,58,200	890	$177.75
Assembly	$10,01,400	136000	$7.36
Inspecting and Finishing	$3,11,200	34600	$8.99
Packaging	$85,200	17300	$4.92
Total	$15,56,000

Solution 3:

		Safe V		Safe T
Particulars	Activity rate	Base	Allocation	Base	Allocation
Setup	$177.75	270	$47,993	620	$1,10,205
Assembly	$7.36	62000	$4,56,320	74000	$5,44,640
Inspecting and Finishing	$8.99	12400	$1,11,476	22200	$1,99,578
Packaging	$4.92	6200	$30,504	11100	$54,612
Total Overhead Assigned			$6,46,293		$9,09,035
Units			62000		74000
Activity based cost per unit			$10.42		$12.28