Question

EyeGuard Equipment Inc. (EEI) manufactures protective eyewear for use in commercial and home applications. The product is also used by hunters, home woodworking hobbyists, and in other applications. The firm has two main product lines-the highest-quality product is called Safe-T, and a low-cost, value version is called Safe-V. Information on the factory conversion costs for Eel is as follows: Salaries Supplies Factory expense Factory Costs $ 859,000 159,000 559,000 $ 1,577,000 EEl uses ABC to determine the unit costs of its products. The firm uses resource consumption cost drivers based on rough estimates of the amount that each activity consumes, as shown below. EEl has four activities: job setup, assembly, inspecting and finishing, and packaging Setup 201 25 Assembly 608 60 90 Salaries Supplies Factory expense Inspecting and Finishing 152 15 10 Packaging 58 Total 1008 100 100 The activity cost drivers for the two products are summarized below. Activities Activity Driver Setup Batch Assembly Units Inspect and finishing Finishing hours Packaging Packing hours Batches Units Finishing hours, per unit Packaging hours, per unit Materials per unit Safe-V 340 69,000 0.30 0.20 $ 4.00 Safe-T 690 81,000 0.20 0.10 $ Required: 1. Determine the amount of the cost pool for each of the four activities. 2. Determine the activity-driver rates for assigning factory costs to the two products, 3. Determine the activity-based unit cost for each of the products.

Answer 1

first stage allocation

we will allocate cost to activities

	set up	Assembly	inspecting	packaging
salaries	$171,800[$859,000*20%]	$515,400[$859,000*60%]	$128,850[$859,000*15%]	$42,950[$859,000*5%]
supplies	$39,750[$159,000*25%]	$95,400[$159,000*60%]	$23,850[$159,000*15%]
factory expense		$503,100[559,000*90%]	$55,900[$559,000*10%]
Total cost pool	$211,550	$1,113,900	$208,600	$42,950

second stage allocation find cost activity driver rates

Activity	Cost pool	driver	Cost per driver[cost pool/cost driver]
Set up	$211,550	1,030 batches[340+690]	$205.38
Assembly	$1,113,900	150,000 units[69,000+81,000]	$7.43
Inspecting	$208,600	36,900[0.3*69,000 + 0.2*81,000]	$5.65
Packaging	$42,950	21,900[0.2*69,000+0.1*81,000]	$1.96

rounded to two decimals

3]

now we will allocate cost to product

		Safe V	Safe T
Set up	$205.38 per batch	$1.01[205.38*340]/69,000 units	$1.75[$205.38*690]/81,000 units
Assembly	$7.43 per unit	$7.43	$7.43
Inspecting	$5.65 per finishing hour	$1.695[$5.65*0.3 per hour]	$1.13[$5.65*0.20 per hour]
Packaging	$1.96 per packaging hour	$0.392[$1.96*0.2 hour per unit]	$0.196[$1.96*0.1]
Material per unit	per unit	$4	$5
Tota unit cost		$14.53[$1.01+7.43+1.695+0.392+4]	$15.51	rounded to two decimals

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