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 EEI is as follows:

	Factory Costs
Salaries	$	851,000
Supplies		151,000
Factory expense		551,000
	$	1,553,000

EEI 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. EEI has four activities: job setup, assembly, inspecting and finishing, and packaging.

	Setup			Assembly			Inspecting and Finishing			Packaging			Total
Salaries		10	%		50	%		25	%		15	%		100	%
Supplies		15			55			30						100
Factory expense					70			30						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

	Safe-V			Safe-T
Batches		260			610
Units		61,000			73,000
Finishing hours, per unit		0.40			0.40
Packaging hours, per unit		0.30			0.20
Materials per unit	$	3.00		$	7

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

1 Cost Pool for four activities
			Set Up	Assembly	Inspecting & Finishing	Packaging	Total
Salaries			10%	50%	25%	15%	100%
			85,100	425,500	212,750	127,650	851,000
Supplies			15%	55%	30%	0%	100%
			22,650	83,050	45,300	0	151,000
Factory Expenses		0%	70%	30%	0%	100%
			0	385,700	165,300	0	551,000
Total			107,750	894,250	423,350	127,650	1,553,000
2. Activity Driver Rates
Activity		Activity Driver		Safe V	Safe T	Total
Set Up		No.of Batches		260	610	870
		Rate			29.89%	70.11%	100.00%
Assembly		No. of Units		61000	73000	134000
		Rate			45.52%	54.48%	100.00%
Inspecting & Finishing	Finishing Hours per unit	0.4	0.4
		Finishing Hours		24400	29200	53600
		Rate			45.52%	54.48%	100.00%
Packaging		Packaging Hours per unit	0.3	0.2
		Packaging Hours		18300	14600	32900
		Rate			55.62%	44.38%	100.00%
3. Activity Based Unit Cost
					Safe V	Safe T	Total
Material Cost					183,000	511,000	694,000
Factory Cost
Set Up					32,201	75,549	107,750
Assembly					407,084	487,166	894,250
Inspecting & Finishing				192,719	230,631	423,350
Packaging					71,003	56,647	127,650
Total					703,007	849,993	1,553,000
Total Cost					886,007	1,360,993	2,247,000
No. of Units					61,000	73,000	134,000
Cost per unit					14.52	18.64