Question

OP 5-38 Unused capacity, activity-based costing, activity-based management. Nivag's Netballs is a manu- facturer of high quality basketballs and volleyballs. Setup costs are driven by the number of batches. Equipment and maintenance costs increase with the number of machine-hours, and lease rent is paid per square foot. Capacity of the facility is 12,000 square feet and Nivag is using only 70% of this capacity. Nivag records the cost of unused capacity as a separate line item, and not as a product cost. The following is the budgeted information for Nivag: Nivag's Netballs Budgeted Costs and Activities For the Year Ended August 31, 2012 Direct materials-basketballs Direct materials-volleyballs Direct manufacturing labor-basketballs Direct manufacturing labor-volleyballs Setup Equipment and maintenance costs Lease rent Total $ 209,750 358,290 107,333 102,969 143,500 109,900 216,000 $1,247,742 Other budget information follows: Basketballs 66,000 11,000 Number of balls Machine-hours Number of batches Square footage of production space used Volleyballs 100,000 12,500 400 5,040 300 3,360 1. Calculate the budgeted cost per unit of cost driver for each indirect cost pool. 2. What is the budgeted cost of unused capacity? 3. What is the budgeted total cost and the cost per unit of resources used to produce (a) basketballs and (b) volleyballs? 4. What factors should Nivag consider if it has the opportunity to manufacture a new line of footballs?

Answer 1

Answer is given below

1. Budgeted cost per unit of cost driver Activity Cost Pool Total Activity Cost Driver rate Set up Equipment and maintenance cost Lease rent $143,500 $109,900 $216,000 700 23,500 12,000 $205.00 $4.68 $18.00 2. $64,800.00 Budgeted Cost of unused Capacity (3,600 square feet * Activity cost driver rate) Budgeted Total Cost Basketballs Volleyballs $209,750 $358,290 $107,333 $102,969 Direct Material Direct Manufacturing Labor Overhead allocated Set up Equipment and maintenance cost Lease Rent Total Cost $61,500 $51,443 $60,480 $490,506 $82,000 $58,457 $90,720 $692,436 Cost per unit of resources Basketballs Volleyballs $3.18 $1.63 $3.58 $1.03 Direct Material Direct Manufacturing Labor Overhead allocated Set up Equipment and maintenance cost Lease Rent Total Cost $0.93 $0.78 $0.92 $7.43 $0.82 $0.58 $0.91 $6.92 Factors to consider to manufacture a new line of footballs - Capacity Utilisation - Activities consumed -Incremental cost of manufacturing