Question

3. A company produces and sells two products. Recently, product A, which the company has made successfully for a long time, has seen a downturn in market demand while product B, a relatively new addition to the company, seems to be quite profitable and sales are higher than predicted. The company traditionally has used machine hours to allocate indirect product costs, but because of the unexpected demand patterns for the two products, the company has analyzed its indirect costs and identified six indirect cost activity pools. Cost and driver information for these activity pools is as follows: Activity Cost of Activity Cost Driver Production scheduling Material handling Machine setup Assembly Inspection Total indirect costs $ 342,144.00 Production runs $ 160,704.00 Material moves $ 90,288.00 Machine setups $ 216,000.00 Machine hours $ 33,264.00 Number of inspections $ 842,400.00 Total Driver Usage of Driver Product Product B 216 72 144 432 126 306 342 72 270 18,000 9,900 8,100 792 480 312

a. How much of the indirect cost would have been applied to product A under the simple costing method using machine hours as the allocation base?

b. How much of the indirect cost would have been applied to product B under the simple costing method using machine hours as the allocation base?

c. Using an activity-based costing system, how much of the indirect costs are allocated to product A?

d. Using an activity-based costing system, how much of the indirect costs are allocated to product B?

Answer 1

Answer to Requirement a & b:

Please find below table showing indirect cost allocation to each product under simple costing method using machine hours as the allocation base:

a. Indirect cost allocated to Product A = $ 463,320 (based on below table)

Indirect Cost of Product A = Each activity cost divided by total machine hrs multiplied by machine hrs of product A

b. Indirect cost allocated to Product B = $ 379,080 (based on below table)

Indirect Cost of Product B = Each activity cost divided by total machine hrs multiplied by machine hrs of product B

Cost of Activity Product A Cost/Total machine hrs* Machine hrs of this product Ref 9,900.00 H Product B Cost/Total machine hrs* Machine hrs of this product 8,100.00 Ref Ref Machine Hrs 18,000.00 Production Scheduling Material Handling Machine Setup Assembly Inspection Total $ 342,144.00A/F*G $ 160,704.00 B/F*G $ 90,288.00 C/F*G $ 216,000.00 D/F*G $ 33,264.00 E/F*G $842,400.00 $ $ $ $ $ $ 188,179.20 A/FH 88,387.20 B/F*H 49,658.40 C/F*H 118,800.00 D/F*H 18,295.20 E/F*H 463,320.00 $ $ $ $ $ $ 153,964.80 72,316.80 40,629.60 97,200.00 14,968.80 379,080.00 A+B+C+D+E

Answer to Requirement c & d:

Please find below table showing indirect cost allocation to each product under activity-based costing system:

c. Indirect cost allocated to Product A = $ 318,888 (based on below table)

d. Indirect cost allocated to Product B = $ 523,512 (based on below table)

Cost of Activity Cost Driver Product A Product B Activity Production Scheduling A Material Handling Machine Setup Assembly Inspection Total A+B+C+D+E A Total Usage Usage of of driver of Ref Driver Product A 216 72 432 126 342 72 18000 9900 792 Total Indirect Cost Activity $342,144.00 Production Runs $ 160,704.00 Material Moves $ 90,288.00 Machine setups $ 216,000.00 Machine hours $ 33,264.00 Number of inspections $842,400.00 Cost / Total cost driver * Usage of Cost / Total cost driver * usage of driver of this driver of usage of driver of this product product Product B product /F*72 $ 114,048.00 144 A/F*144 $ 228,096.00 B/G*126 $ 46,872.00 306 B/G*306 $ 113,832.00 C/H*72 $ 19,008.00 270 c/H*270 $ 71,280.00 D/1*9900 $ 118,800.00 8100 D/1*8100 $ 97,200.00 E/J*480 $ 20,160.00 312 E/)*312 $ 13,104.00 $ 318,888.00 $ 523,512.00