Question

Assume that SunSpecs Corporation makes three types of sunglasses, Razors, Slims, and Eagles, for major retailers such as Ray-Ban and Gucci. SunSpecs presently applies overhead using a predetermined rate based on direct labor hours. A consultant recommended that SunSpecs switch to activity-based costing. Management decided to give ABC a try and identified the following activities, cost drivers, and estimated costs for Year 2 for each activity center.

Activity                                                                 Recommended Cost Driver         Annual Costs      Estimated Annual Costs driver units

Production Setup      # of Production Runs                          $60000                              200

Order Processing                                             # of Orders                                             $100000                            400

Materials Handling                                          Pounds of Materials Used                $40000                              16000

Equip Depreciation & Maintenance         Machine Hrs                                           $120000                            20000

Quality Management                                     # of Inspections                                                    $100000                            800

Packing & Shipping                                          # of Units Shipped                             $80000                              80000

                                                                                                                                                    $500000

The company estimated 10,000 labor hours would be worked in all of Year 2. Assume the following activities occurred in February of Year 2:

                                                                                Razors                   Slims                      Eagles

# of units produced                                        3000                       2000                       1000      

Direct materials costs                                     8000                       5000                       4000

Direct Labor Hrs                                                300                         200                         100

# of Production Runs                                      2                              4                              10

# of Orders                                                         16                           16                           16

Pounds of Material Used                              800                         500                         300

Machine Hrs                                                       800                         400                         400                        

# of Inspections                                                                20                           20                           20

Units Shipped                                                    3000                       2000                       1000      

Direct Labor costs are $20 per hr               6000                       4000                       2000

b. Compute the production costs for each product for February using the cost drivers recommended by the consultant.

Answer 1

Production setup	$60,000	200	$300	per production run
Order processing	100,000	400	250	per orders
Materials handling	40,000	16,000	2.5	per pounds of material used
Equip. Depreciation and maintenance	120,000	20,000	6	per machine hours
Quality management	100,000	800	125	per inspection
Packing & Shipping	80,000	80,000	1	per units shipped

	Razor	Slim	Eagle
Direct material	$8,000	$5,000	$4,000
Direct labor	6,000	4,000	2,000
Overhead:
Production setup@$300	600	1,200	3,000
Order processing@$250	4,000	4,000	4,000
Materials handling@$2.5	2,000	1,250	750
Equip. Depreciation and maintenance@$6	4,800	2,400	2,400
Quality management@$125	2,500	2,500	2,500
Packing & Shipping@$1	3,000	2,000	1,000
Total production cost	$30,900	$22,350	$19,650