Question

Could you please help me to solve this exercise. I m very grateful if you can do it in details with so that i can understand how numbers come from.

Many many thanks.

Anna.

HiTech Products manufactures three types of DVD player, Economy, Standard and Deluxe. The Co. which uses activity- based costing, has identified five activities. Each activity, its budgeted cost and related cost driver is identified below:

Activity	Cost	Cost Drivers
Material handling	$225,000	No. of parts
Material insertion	2, 475, 000	No. of parts
Automated machinery	840, 000	Machine hours
Finishing	170,000	Direct labor hours
Packaging	170,000	Oders shipped
Total	3, 880,000

The following that the company is working at capacity:

	Economy	Standard	Deluxe
Units to be produced	10,000	3, 000	2,000
Orders to be shipped	1,000	500	200
Number of parts per unit	10	15	25
Machine hours per unit	3	3	5
Labor hour per unit	2	2	2

Assume that the co. is working at capacity:

1. What is the cost application rate for material handling activity and for the packing activity?
2. Under an activity based costing system, what is the per unit cost of Economy and per unit cost of Deluxe?
3. Assume that Hitech is using a volume – based costing system, and the preceding manufacturing costs are applied to all products based on direct labor hours. How much of the preceding cost is assigned to Deluxe?

Answer 1

Activity	Allocation base	Ratio	Economy	Standard	Deluxe	Total cost for the activity
Material handling	Total No.of parts	100000:45000:50000	115385	51923	57692	225000
Material insertion	Total No.of parts	100000:45000:50000	1269231	571154	634615	2475000
Automated machinery	Total M/c hrs	30000:9000:10000	514286	154286	171429	840000
Finishing	Total D/labor hrs.	20000:6000:4000	113333	34000	22667	170000
Packaging	Oders shipped	1000:500:200	100000	50000	20000	170000
Total cost			2112234	861363	906403	3880000
No.of Units			10,000	3000	2,000
Per unit cost(Total cost/No.of units)			211.22	287.12	453.20

Cost application Rate for material handling activity= Total Budgeted cost for the activity/Total No.of parts

$ 225000/195000 parts

1.15385

ie. $ 1.15385/ part

Cost application Rate for Packaging activity= Total Budgeted cost for the activity/Total no.of orders shipped

$ 170000/1700 orders shipped

100

ie.$ 100/order shipped

Under an activity based costing system,

Per unit cost of Economy --- $ 211.22 ( Refer table)

per unit cost of Deluxe ----- $ 453. 2 ( Refer table)

Total manufacturing costs assigned to Deluxe based on direct labor hrs.

3880000*4000 labor hrs./30000 labor hrs.=

517333

ie. 517333/2000=

$ 258.67 /unit