Question

eBook Calculator 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 75,000 31,500 4,500 45,000 1,500 24,000 Direct labor hours 75,000 Engineering support (hours) 13,500 Receiving (orders processed) 3,000 Materials handling (number of moves) 15,000 Purchasing (number of requisitions) 750 Maintenance (hours used) 6,000 Paying suppliers (invoices processed) 3,750 Setting up batches (number of setups) 60 Additionally, the following overhead activity costs are reported: Maintenance $600,000 Engineering support 900,000 Materials handling 1,200,000 3,750 540 Setups 750,000 Purchasing 450,000 Receiving 300,000 Paying suppliers 300,000 Anna

Answer 1

1	Calculation of cost per unit for each product using direct labor hours to assign all overhead costs:
	Total factory Overhead Costs	$               4,500,000
	Total Direct labor Hours (75000+75000)	150,000
	Overhead rate per labor hour = 4500000 / 150000	$                             30
		Standard Model	Deluxe Model
	Total Prime Cost	$               4,500,000	$               5,250,000
	Add: Overhead Costs	$               2,250,000	$               2,250,000
		(75000*30)	(75000*30)
	Total Costs (A)	$               6,750,000	$               7,500,000
	Total Number of units produced (B)	30,000	15,000
	Unit Cost = A/B	$                           225	$                           500

2	Calculation of Activity Rates :
	Cost Pool	Total Overhead	Activity	Activity Rate
			Standard Model	Deluxe Model	Total
		A			B	A/B
	Maintenance	$ 600,000	6,000	24,000	30,000	$20	per hour used
	Engineering support	$ 900,000	13,500	31,500	45,000	$ 20	per hour
	Materials handling	$ 1,200,000	15,000	45,000	60,000	$ 20	per move
	Setups	$  750,000	60	540	600	$1,250	per setup
	Purchasing	$  450,000	750	1,500	2,250	$200	per requisition
	Receiving	$  300,000	3,000	4,500	7,500	$ 40	per order
	Paying suppliers	$ 300,000	3,750	3,750	7,500	$ 40	per invoice

3	Calculation of overhead cost per unit:
	For Standard Model:
	Cost Pool	Activity	Rate	Amount
		A	B	A*B
	Maintenance	6,000	$  20	$ 120,000
	Engineering support	13,500	$  20	$ 270,000
	Materials handling	15,000	$  20	$ 300,000
	Setups	60	$ 1,250	$ 75,000
	Purchasing	750	$ 200	$  150,000
	Receiving	3,000	$ 40	$  120,000
	Paying suppliers	3,750	$ 40	$ 150,000
	Total Overhead Allocated			$ 1,185,000
	For Deluxe Model:
	Cost Pool	Activity	Rate	Amount
		A	B	A*B
	Maintenance	24,000	$20	$ 480,000
	Engineering support	31,500	$20	$ 630,000
	Materials handling	45,000	$ 20	$ 900,000
	Setups	540	$ 1,250	$  675,000
	Purchasing	1,500	$ 200	$ 300,000
	Receiving	4,500	$ 40	$ 180,000
	Paying suppliers	3,750	$ 40	$  150,000
	Total Overhead Allocated			$ 3,315,000
	Calculation of Unit Cost;
		Standard Model	Deluxe Model
	Total Prime Cost	$  4,500,000	$  5,250,000
	Add: Overhead Costs	$ 1,185,000	$  3,315,000
	Total Costs (A)	$  5,685,000	$  8,565,000
	Total Number of units produced (B)	30,000	15,000
	Unit Cost = A/B	$  189.50	$  571

which cost is most accurate? activity-based method