Question

Walnut Systems produces two different products, Product A, which sells for $120 per unit, and Product B, which sells for $180 per unit, using three different activities: Design, which uses Engineering Hours as an activity driver; Machining, which uses machine hours as an activity driver; and Inspection, which uses number of batches as an activity driver. The cost of each activity and usage of the activity drivers are as follows: Usage by Cost Product A Usage by Product B Design (Engineering Hours) $ 150,000 200 300 Machining (Machine Hours) $ 500,000 1,000 3,000 Inspection (Batches) $ 30,000 45 15 Walnut manufactures 10,000 units of Product A and 7,500 units of Product B per month. Each unit of Product A uses $50 of direct materials and $20 of direct labor, while each unit of Product Buses $75 of direct materials and $35 of direct labor. Required: Calculate the activity rate for Design

Answer 1

Design activity proportions :

A = 200/500 = 40%

B = 300/ 500 = 60%

Machining :

A = 1000/ 4000= 25%

B = 3000 / 4000 = 75%

Inspection

A = 45/ 60 = 75%

B = 15/ 60 = 25%

	Product A	Product B
Design	60000	90000
Machining	125000	375000
Inspection	22500	7500
Total indirect costs	207500	472500
No of units produced	10,000	7500
Indirect cost per unit	20.75	63
	Product A	Product B
Selling price	120	180
Less:
Direct Materials	50	75
Direct Labor	20	35
Indirect cost per unit	20.75	63
Gross Profit	29.25	7