Question

Activity-Based Product Costing

Sweet Sugar Company manufactures three products (white sugar, brown sugar, and powdered sugar) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:

Activity		Budgeted Activity Cost
Production			$471,200
Setup			310,800
Inspection			81,000
Shipping			156,000
Customer service			65,500
	Total		$1,084,500

The activity bases identified for each activity are as follows:

Activity	Activity Base
Production	Machine hours
Setup	Number of setups
Inspection	Number of inspections
Shipping	Number of customer orders
Customer service	Number of customer service requests

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

			Machine Hours		Number of Setups		Number of Inspections		Number of Customer Orders		Customer Service Requests		Units
White sugar			3,340		180		200		780		50		8,350
Brown sugar			2,130		270		300		2,150		320		5,325
Powdered sugar			2,130		250		500		970		130		5,325
	Total		7,600		700		1,000		3,900		500		19,000

Each product requires 0.9 machine hour per unit.

Required:

If required, round all per unit amounts to the nearest cent.

1. Determine the activity rate for each activity.

Production	$ per machine hour
Setup	$ per setup
Inspection	$ per move
Shipping	$ per cust. ord.
Customer service	$ per customer service request

2. Determine the total and per-unit activity cost for all three products.

	Total Activity Cost	Activity Cost Per Unit
White sugar	$	$
Brown sugar
Powdered sugar

3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?

The unit costs are different because the products consume many activities in ratios different from the  .

Answer 1

Answers

• All working forms part of the answer
• Requirement 1

Activity	Budgeted Activity Cost	Total activity	Activity rates = ANSWERs
Production	$              471,200	7,600	$                 62.00	per machine hour
Setup	$              310,800	700	$               444.00	per setup
Inspection	$                81,000	1,000	$                 81.00	per move
Shipping	$              156,000	3,900	$                 40.00	per cust. ord.
Customer service	$                65,500	500	$               131.00	per customer service request
Total	$          1,084,500

• Requirement 2

	Total Activity Cost	Activity Cost Per Unit
White sugar	$    340,950.00	$                 40.83
Brown sugar	$    404,160.00	$                 75.90
Powdered sugar	$    339,390.00	$                 63.74

--Working

White sugar		Activity rates	Total Activity Costs
Production	3340	$                   62.00	$       207,080.00
Setup	180	$                444.00	$         79,920.00
Inspection	200	$                   81.00	$         16,200.00
Shipping	780	$                   40.00	$         31,200.00
Customer service	50	$                131.00	$           6,550.00
TOTAL			$       340,950.00

Brown sugar		Activity rates	Total Activity Costs
Production	2130	$                   62.00	$       132,060.00
Setup	270	$                444.00	$       119,880.00
Inspection	300	$                   81.00	$         24,300.00
Shipping	2150	$                   40.00	$         86,000.00
Customer service	320	$                131.00	$         41,920.00
TOTAL			$       404,160.00

Powdered sugar		Activity rates	Total Activity Costs
Production	2130	$                   62.00	$       132,060.00
Setup	250	$                444.00	$       111,000.00
Inspection	500	$                   81.00	$         40,500.00
Shipping	970	$                   40.00	$         38,800.00
Customer service	130	$                131.00	$         17,030.00
TOTAL			$       339,390.00

• Requirement 3

The unit costs are different because the products consume many activities in ratios different from the machine hour per unit consumption.