Question

Activity-Based Costing Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activities-production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity bases for these activities: Activity Activity Cost Production setup Procurement $ 58,500 136,500 182,000 200,000 Activity Base Number of setups Number of purchase orders (PO) Number of inspections Number of components Quality control Materials management Total $577,000 The activity-base usage quantities for each product are as follows: Setups Purchase Orders Inspections Components Unit Volume Custom 200 1,200 2,400 550 2,000 Standard 250 100 200 450 2,000 Total 450 1,300 2,600 1,000 4,000

Answer 1

SOLUTION

a.

	Product setup	Procurement	Quality control	Material management
Activity cost (A)	58,500	136,500	182,000	200,000
Activity base (B)	450	1,300	2,600	1,000
Activity rate (A/B)	130 per setup	105 per purchase order	70 per inspection	200 per component

b.

	Custom	Custom	Standard	Standard
	Amount ($)	Working	Amount ($)	Working
Setup total	26,000	(200*$130)	32,500	(250*$130)
Purchase order total	126,000	(1,200*$105)	10,500	(100*$105)
Inspection total	168,000	(2,400*$70)	14,000	(200*$70)
Components total	110,000	(550*$200)	90,000	(450*$200)
Total product cost (A)	430,000		147,000
Unit volume (B)	2,000		2,000
Unit cost (A/B)	215		73.50

c. Overhead rate = Estimated overhead cost / Estimated labor hours

= $577,000 / [(2,000*1)+(2,000*1)]

= $577,000 / 4,000 = 144.25

d. The custom product will consume more materials management activities than will the standard product.