Activity Rates and Product Costs using Activity-Based Costing Lonsdale Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated budgeted activity costs and activity bases are as follows: Activity Budgeted Activity Cost Activity Base Casting $570,000 Machine hours Assembly 80,000 Direct labor hours Inspecting 42,000 Number of inspections Setup 38,000 Number of setups Materials handling 23,750 Number of loads Corporate records were obtained to estimate the amount of activity to be used by the two products. The estimated activity-base usage quantities and units produced follow: Activity Base Entry Dining Total Machine hours 6,000 13,000 19,000 Direct labor hours 3,000 2,000 5,000 Number of inspections 600 400 1,000 Number of setups 300 200 500 Number of loads 450 500 950 Units produced 6,000 3,000 9,000 a. Determine the activity rate for each activity. Activity Activity Rate Casting $ per machine hour Assembly $ per direct labor hour Inspecting $ per inspection Setup $ per setup Materials handling $ per load b. Use the activity rates in (a) to determine the total and per-unit activity costs associated with each product. Round the per unit amounts to the nearest cent. Product Total Activity Cost Activity Cost Per Unit Entry Lighting Fixtures $ $ Dining Room Lighting Fixtures $ $
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.
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Activity Rates and Product Costs using Activity-Based Costing
Lonsdale Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated budgeted activity costs and activity bases are as follows:
ActivityBudgeted
Activity Cost
Activity BaseCasting $570,000 Machine hours Assembly 80,000 Direct labor hours Inspecting 42,000 Number of inspections Setup 38,000 Number of setups Materials handling 23,750 Number of loads Corporate records were obtained to estimate the amount of activity to be used by the two products. The estimated activity-base usage quantities and units produced follow:
Activity Base Entry Dining Total Machine hours 6,000 13,000 19,000 Direct labor hours 3,000 2,000 5,000 Number of inspections 600 400 1,000 Number of setups 300 200 500 Number of loads 450 500 950 Units produced 6,000 3,000 9,000 a. Determine the activity rate for each activity.
Activity Activity Rate Casting $ per machine hour Assembly $ per direct labor hour Inspecting $ per inspection Setup $ per setup Materials handling $ per load b. Use the activity rates in (a) to determine the total and per-unit activity costs associated with each product. Round the per unit amounts to the nearest cent.
Product Total Activity Cost Activity Cost Per Unit Entry Lighting Fixtures $ $ Dining Room Lighting Fixtures $ $
Identifying Activity Bases in an Activity-Based Cost System
Comfort Foods Inc. uses activity-based costing to determine product costs. For each activity listed in the left column, select an appropriate activity base from the right column. You may use items in the dropdown list more than once or not at all.
| Activity | Activity Base |
| Cafeteria | |
| Customer return processing | |
| Electric power | |
| Human resources | |
| Inventory control | |
| Invoice and collecting | |
| Machine |
|
| Materials handling | |
| Order shipping | |
| Payroll | |
| Performance reports | |
| Production control | |
| Production setup | |
| Purchasing | |
| Quality control | |
| Sales order processing |
|
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Single Plantwide and Multiple Production Department Factory Overhead Rate Methods and Product Cost Distortion
The management of Nova Industries Inc. manufactures gasoline and diesel engines through two production departments, Fabrication and Assembly. Management needs accurate product cost information in order to guide product strategy. Presently, the company uses a single plantwide factory overhead rate for allocating factory overhead to the two products. However, management is considering the multiple production department factory overhead rate method. The following factory overhead was budgeted for Nova:
Fabrication Department factory overhead $440,000 Assembly Department factory overhead 200,000 Total $640,000 Direct labor hours were estimated as follows:
Fabrication Department 4,000 hours Assembly Department 4,000 Total 8,000 hours In addition, the direct labor hours (dlh) used to produce a unit of each product in each department were determined from engineering records, as follows:
Production Departments Gasoline Engine Diesel Engine Fabrication Department 6.0 dlh 4.0 dlh Assembly Department 4.0 6.0 Direct labor hours per unit 10.0 dlh 10.0 dlh a. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the single plantwide factory overhead rate method, using direct labor hours as the activity base.
Gasoline engine $ per unit Diesel engine $ per unit b. Determine the per-unit factory overhead allocated to the gasoline and diesel engines under the multiple production department factory overhead rate method, using direct labor hours as the activity base for each department.
Gasoline engine $ per unit Diesel engine $ per unit c. Recommend to management a product costing approach, based on your analyses in (a) and (b).
Management should select the factory overhead rate method of allocating overhead costs. The factory overhead rate method indicates that both products have the same factory overhead per unit. Each product uses the direct labor hours . Thus, the rate method avoids the cost distortions by accounting for the overhead .
roduct Costs and Product Profitability Reports, using a Single Plantwide Factory Overhead Rate
Isaac Engines Inc. produces three products—pistons, valves, and cams—for the heavy equipment industry. Isaac Engines has a very simple production process and product line and uses a single plantwide factory overhead rate to allocate overhead to the three products. The factory overhead rate is based on direct labor hours. Information about the three products for 20Y2 is as follows:
| Budgeted Volume (Units) |
Direct Labor Hours Per Unit |
Price Per Unit |
Direct Materials Per Unit |
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| Pistons | 6,000 | 0.30 | $40 | $ 9 | ||||
| Valves | 13,000 | 0.50 | 21 | 5 | ||||
| Cams | 1,000 | 0.10 | 55 | 20 |
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