Question

Activity-Based Costing and Product Cost Distortion

Digital Storage Concept Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 4,000 direct labor hours. The total indirect labor is budgeted to be $504,000.

Time records from indirect labor employees revealed that they spent 60% of their time setting up production runs and 40% of their time supporting actual production.

The following information about cell phones and tablet PCs was determined from the corporate records:

		Number of Setups			Direct Labor Hours			Units
Cell phones			1,600			2,000			72,000
Tablet PCs			800			2,000			72,000
	Total		2,400			4,000			144,000

If required, round your answers to the nearest cent.

a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base. Cell phones per unit Tablet PCs per unit b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities–one for setup and the other for production support. Budgeted Activity Cost Activity Rate Setup per setup per direct labor hour Production support c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing. Cell phones per unit Tablet PCs S per unit

Answer 1

a.

Plantwide overhead rate = $504000/ 4000 = $126 per LH

Indirect labor cost allocated per unit:

Cell Phones = 2000*$126 / 72000 = $3.50

Tablet PCs = 2000*$126 / 72000 = $3.50

b.

Computation of Budgeted Activity Cost and Activity rates
	Budgeted Activity Cost	Total Cost Driver	Activity Rate (Cost / Drivers)
Setup ($504000*60%)	$3,02,400	2400	setups	$126.00
Production Support (504000*40%)	$2,01,600	4000	Direct Labor hours	$50.40

c.

Computation Activity cost per unit allocated to Cell Phones
	Usage of Cost Driver	Activity Rate	Allocated Cost
Setup	1600	$126.00	$2,01,600
Production Support	2000	$50.40	$1,00,800
Total Activity cost Allocated to Cell phones	$3,02,400
Units	60000
Activity cost per unit (Cell phone)	$5.04

Computation Activity cost per unit allocated to Tablet PCs
	Usage of Cost Driver	Activity Rate	Allocated Cost
Setup	800	$126.00	$1,00,800
Production Support	2000	$50.40	$1,00,800
Total Activity cost Allocated to Tablet PCs	$2,01,600
Units	60000
Activity cost per unit (Tablet PCs)	$3.36