Question

Activity-Based Costing Slack Corporation has the following predicted indirect costs and cost drivers for 2016 for the given activity cost pools Fabrication Department Finishing Department Cost Driver Maintenance Materials handling Machine setups Inspections $65,000 30,000 70,000 $55,000 Machine hours 15,000 Material moves 5,000 Machine setups 25,000 Inspection hours 165,000 $100,000 The following activity predictions were also made for the year Machine hours Material moves Machine setups Inspection hours Fabrication Department Finishing Department 5,000 1,500 50 1,000 10,000 3,000 700 It is assumed that the cost per unit of activity for a given activity does not vary between departments. Slack's president, Charles Slack, is trying to evaluate the company's product mix strategy regarding two of its five product models, ZX300 and SL500. The company has been using a company-wide overhead rate based on machine hours but is considering switching to either department rates or activity- based rates. The production manager has provided the following data for the production of a batch of 100 units for each of these models: ZX300 SLS00 d F4 1 F3 F7 F8

Answer 1

Slack Corporation

1. Determination of cost of one unit each of ZX300 and SL500, assuming a company-wide overhead rate is used based on total machine hours:

Total overhead cost = overhead cost of Fabrication Department + overhead cost of Finishing Department

= $165,000 + 100,000 = $265,000

Total machine hours = 15,000 hours

Company-wide Overhead rate per machine hour = $265,000/15,000 hrs = $17.67 per MH

Using rounded overhead rate to calculate cost per unit:

	ZX300	SL500
Direct Materials	$17,000	$23,000
Direct Labor	$5,000	$4,000
Manufacturing overhead	$12,367.00	$14,133.00
Total cost per batch	$34,367	$41,133
Number of units per batch	100	100
cost per unit	$343.67	$411.33

Notes: total manufacturing overhead for ZX300 = $17.67 x (500MH + 200MH) = $12,367

Manufacturing overhead for SL500 = $17.67 x (700MH + 100MH) = $14,133

1. Determination of cost of one unit of ZX300 and SL500, assuming department overhead rate are used, with machine hours as basis in both the departments:

Overhead rate based on machine hours for Fabrication Dept.= $165,000/10,000 MH = $16.50 per MH

Overhead rate based on machine hours for Finishing Dept. = $100,000/5,000 MH = $20 per MH

Product Cost per unit –

	ZX300	SL500
Direct Materials	$17,000	$23,000
Direct Labor	$5,000	$4,000
Fabrication Dept. Manufacturing overhead	$8,250.00	$11,550.00
Finishing Dept. Manufacturing overhead	$4,000	$2,000
Total cost per batch	$30,250	$40,550
Number of units per batch	100	100
cost per unit	$302.50	$405.50

Overhead rate based on dept. wide machine hours for ZX300 –

Fabrication department - $16.50 x 500 MH = $8,250

Finishing Dept. = $20 x 200 = $4,000

Overhead cost based on dept. wide machine hours for SL500 –

Fabrication dept. = $16.50 x 700 MH = $11,550

Finishing Dept. = $20 x 100 MH = $2,000

1. Determination of cost of one unit of ZX300 and SL500, assuming activity-based overhead rates are used for maintenance, material handling, machine setup and inspection activities:

Activity based overhead rates –

Activities	Cost per driver
Maintenance	$8 per MH
Material Handling	$10 per move
Machine setup	$100 per setup
Inspection	$25 per inspection hour

Activities	Activity Cost	Activity Usage	Cost per driver
Maintenance	$120,000	15,000	$8 per MH
Material Handling	$45,000	4,500 material moves	$10 per move
Machine setup	$75,000	750 machine setups	$100 per setup
Inspection	$25,000	1,000 inspection hours	$25 per inspection hour

Product Cost per unit:

	ZX300	SL500
Direct Materials	$17,000	$23,000
Direct Labor	$5,000	$4,000
Manufacturing overhead:
maintenance activity	$5,600	$6,400
materials handling activity	$300	$500
machine setup activity	$500	$900
inspection activity	$750	$1,500
Total cost per batch	$29,150	$36,300
number of units per batch	100	100
cost per unit	$291.50	$363

Manufacturing overhead:

Maintenance activity cost –

ZX300 = $8 x (500 MH + 200 MH) = $5,600

SL500 = $8 x (700 MH + 100 MH) = $6,400

Material handling activity cost –

ZX300 = $10 x 30 material moves = $300

SL500 = $10 x 50 material moves = $500

Machine setup activity –

ZX300 = $100 x 5 setups = $500

SL500 = $100 x 9 setups = $900

Inspection activity cost –

Z9 setups = $900

Inspection activity cost –

ZX300 = $25 x 30 inspection hours = $750

SL500 = $25 x 60 inspection hours = $1,500