Question

Part I

Performance Products Corporation makes two products, Titanium Rims and Posts. Data regarding the two products is provided in the following table:

	Direct Labor Hours per Unit	Annual Production
Rims	0.40	20,000 units
Posts	0.20	80,000 units

Additional information about the company follows:

1. Rims require $17.00 in direct materials per unit, and Posts require $10.00.
2. The direct labor wage rate is $16.00 per hour.
3. Rims are more complex to manufacture than Posts, and they require special equipment.
4. The Activity Based Costing (ABC) System has the following activity cost pools:

Activity Cost Pool	Activity Measure	Estimated Overhead Cost	Rims	Posts	Total Activity for                 Rims and Posts
Machine Setups	Number of                    Machine Setups	$21,600	100	80	180
Special Processing	Machine Hours	$180,000	4,000	0	4,000
General Factory	Direct Labor Hours	$288,000	8,000	16,000	24,000

Required - Use the tables on the following page to determine the following required components:

In order to receive full credit please show all work!!

1. Compute the activity rate for each activity pool.
2. Determine the amount of manufacturing overhead assigned to each product (Rims and Posts) for each activity cost pool.
3. Determine the unit product cost of each product (Rims and Posts) according to the                      ABC system.

Part II

1. List and describe the steps (in order) for Implementing Activity Based and Costing.
2. Identify and describe the limitations of Activity Based Costing.

Answer 1

Answer is given below

Part 1 Activity Cost pool Machine set ups Special processing General factory Total Overheads Cost Pool $21,600 $180,000 $288,000 $489,600 Total Activities 180 4,000 24,000 Activity Rate $120.00 per machine set up $45.00 per machine hour $12.00 per direct labor hour 2 Allocation of Overheads as per ABC method Rims Posts Expected use Activity rate of cost drivers Expected use of cost drivers 100 4,000 8,000 Cost Assigned $9,600 $120.00 $45.00 $12.00 Activity rate $120.00 $45.00 $12.00 Cost Assigned $12,000 $180,000 $96,000 $288,000 20,000 $14.40 Machine set ups Special processing General factory Total Allocation Total production Overhead cost per unit 16,000 $192,000 $201,600 80,000 $2.52 Unit Product cost Direct Material Direct Labor Manufacturing overhead Cost per unit Rims $17.00 $6.40 $14.40 $37.80 Posts $10.00 $3.20 $2.52 $15.72 Rims 0.4/ Direct labor per unit Labor hour rat Direct labor cost per unit Posts 0.2 $16 $3.201 $16 $6.401 Part 11 steps performed at beginning of the year for ABC Costing 1. identification of activities required for the products manufactured 2. assign overheads to the activities identified in step 1 3. identify cost driver for each of the activates identified in step 1 4. Calculate cost driver rate for each of the activity cost pool 5. Allocate cost to the products based on the activities consumed by each product Limitations of ABC Costing - ABC costing method is time consuming since it needs identification of activities and calculating activity cost driver rates - It needs specialized knowledge to apply the ABC costing method throughout the organisation - ABC method is not useful if cost is more than benefits involved in implementing it