Activity-Based Product Costing Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) 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 Activity Cost Pool Production $259,200 Setup 55,000 Materials handling 9,750 Inspection 60,000 Product engineering 123,200 Total $507,150 The activity bases identified for each activity are as follows: Activity Activity Base Production Machine hours Setup Number of setups Materials handling Number of parts Inspection Number of inspection hours Product engineering Number of engineering hours 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 Parts Number of Inspection Hours Number of Engineering Hours Units Alpha 1,440 75 65 400 125 1,800 Beta 1,080 165 80 300 175 1,350 Omega 720 310 180 500 140 900 Total 3,240 550 325 1,200 440 4,050 Each product requires 48 minutes per unit of machine time. Required: If required, round all per unit amounts to the nearest cent. 1. Determine the activity rate for each activity. Production $fill in the blank 1 per machine hour Setup $fill in the blank 2 per setup Materials handling $fill in the blank 3 per part Inspection $fill in the blank 4 per inspection hour Product engineering $fill in the blank 5 per engineering hour 2. Determine the total and per-unit activity cost for all three products. Total Activity Cost Activity Cost Per Unit Alpha $fill in the blank 6 $fill in the blank 7 Beta fill in the blank 8 fill in the blank 9 Omega fill in the blank 10 fill in the blank 11 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
Process Costing
Process costing is a sort of operation costing which is employed to determine the value of a product at each process or stage of producing process, applicable where goods produced from a series of continuous operations or procedure.
Job Costing
Job costing is adhesive costs of each and every job involved in the production processes. It is an accounting measure. It is a method which determines the cost of specific jobs, which are performed according to the consumer’s specifications. Job costing is possible only in businesses where the production is done as per the customer’s requirement. For example, some customers order to manufacture furniture as per their needs.
ABC Costing
Cost Accounting is a form of managerial accounting that helps the company in assessing the total variable cost so as to compute the cost of production. Cost accounting is generally used by the management so as to ensure better decision-making. In comparison to financial accounting, cost accounting has to follow a set standard ad can be used flexibly by the management as per their needs. The types of Cost Accounting include – Lean Accounting, Standard Costing, Marginal Costing and Activity Based Costing.
Activity-Based Product Costing
Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) 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 | Activity Cost Pool | |||
| Production | $259,200 | |||
| Setup | 55,000 | |||
| Materials handling | 9,750 | |||
| Inspection | 60,000 | |||
| Product engineering | 123,200 | |||
| Total | $507,150 |
The activity bases identified for each activity are as follows:
| Activity | Activity Base |
| Production | Machine hours |
| Setup | Number of setups |
| Materials handling | Number of parts |
| Inspection | Number of inspection hours |
| Product engineering | Number of engineering hours |
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 Parts | Number of Inspection Hours | Number of Engineering Hours | Units | |||||||||||
| Alpha | 1,440 | 75 | 65 | 400 | 125 | 1,800 | ||||||||||
| Beta | 1,080 | 165 | 80 | 300 | 175 | 1,350 | ||||||||||
| Omega | 720 | 310 | 180 | 500 | 140 | 900 | ||||||||||
| Total | 3,240 | 550 | 325 | 1,200 | 440 | 4,050 |
Each product requires 48 minutes per unit of machine time.
Required:
If required, round all per unit amounts to the nearest cent.
1. Determine the activity rate for each activity.
| Production | $fill in the blank 1 per machine hour |
| Setup | $fill in the blank 2 per setup |
| Materials handling | $fill in the blank 3 per part |
| Inspection | $fill in the blank 4 per inspection hour |
| Product engineering | $fill in the blank 5 per engineering hour |
2. Determine the total and per-unit activity cost for all three products.
| Total Activity Cost | Activity Cost Per Unit | |
| Alpha | $fill in the blank 6 | $fill in the blank 7 |
| Beta | fill in the blank 8 | fill in the blank 9 |
| Omega | fill in the blank 10 | fill in the blank 11 |
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 .
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