Question

Please verify the correct answers below and complete the ending question.

Unit-Based Versus Activity-Based Costing Fisico Company produces exercise bikes. One of its plants produces two versions: a standard model and a deluxe model. The deluxe model has a wider and sturdier base and a variety of electronic gadgets to help the exerciser monitor heartbeat, calories burned, distance traveled, etc. At the beginning of the year, the following data were prepared for this plant: Standard Model Deluxe Model Expected quantity 30,000 15,000 Selling price $370 $700 Prime costs $4.5 million $5.25 million Machine hours 37,500 37,500 Direct labor hours 75,000 75,000 Engineering support (hours) 13,500 31,500 Receiving (orders processed) 3,000 4,500 Materials handling (number of moves) 15,000 45,000 Purchasing number of requisitions) 750 1,500 Maintenance (hours used) 6,000 24,000 Paying suppliers (invoices processed) 3,750 3,750 Setting up batches (number of setups) 540 Additionally, the following overhead activity costs are reported: Maintenance $600,000 900,000 Engineering support Materials handling 1,200,000 Setups 750,000 Purchasing 450,000 Receiving 300,000 Paying suppliers 300,000 $4,500,000
Options for drop down activity-based method / unit-based method

Answer 1

Activity based costing allocates cost on the basis of various cost driver which are related to activity.

Cost per cost driver is determined and than allocated to products as per usage.

(1) Direct labor hours

	Standard	Deluxe
Prime cost	$4,500,000	$5,250,000
Overhead cost	$2,250,000($30*75,000)	$2,250,000($30*75,000)
Total cost	$6,750,000	$7,500,000
Cost per unit	$225($6,750,000/30,000)	$500(7,500,000/15,000)

overhead cost per direct labor hour= $4,500,000/(75,000+75,000)

=$30 per direct labor hour

(2)

Activity	Cost driver	Activity rate
Maintenance	30,000(6000+24000)	$20 per hour used($600,000/30,000)
engineering support	45,000(13,500+31,500)	$20 per hour($900,000/45,000)
materials handling	60,000(15,000+45,000)	$20 per move($1,200,000/60,000)
setups	600(60+540)	$1250 per setup($750,000/600)
purchasing	2250(750+1500)	$200 per requisition($450,000/2250)
receiving	7500(3000+4500)	$40 per order($300,000/7500)
paying suppliers	7500(3750+3750)	$40 per invoicing($300,000/7500)

(3) we will now allocate the cost

Activity	Activity rate	Standard	Deluxe
Maintenance	$20 per hour used($600,000/30,000)	$120,000 ($20*6000)	$480,000($20*24000 maintenance hours used)
engineering support	$20 per hour($900,000/45,000)	$270,000($20*13,500)	$630,000($20*31,500)
materials handling	$20 per move($1,200,000/60,000)	$300,000($20*15,000)	$900,000($20*45,000)
setups	$1250 per setup($750,000/600)	$75,000($1250*60)	$675,000($1250*540)
purchasing	$200 per requisition($450,000/2250)	$150,000($200*750)	$300,000($200*1500)
receiving	$40 per order($300,000/7500)	$120,000($40*3000)	$180,000($40*4500)
paying suppliers	$40 per invoicing($300,000/7500)	$150,000($40*3750)	$150,000($40*3750)
	Overhead cost allocated	$1,185,000	$3,315,000
	Add: prime cost	$4,500,000	$5,250,000
	Total costs	$5,685,000(1,185,000+4,500,000)	$8,565,000
	Total units	30,000	15,000
	cost per unit	$189.5 per unit($5,685,000/30,000)	$571 per unit ($8,565,000/15,000)

(3) ABC costing approach is better than single activity rate. ABC costing approach allocates cost individually on the basis of related activity usage by products.

Using single activity rate will result into misappropriation of cost and may result into unrealistic profit/loss.

Thus, Activity based costing is most accurate.