Walnut Systems produces two different products, Product A, which sells for $127 per unit, and Product B, which sells for $209 per unit, using three different activities: Design, which uses Engineering Hours as an activity driver; Machining, which uses machine hours as an activity driver; and Inspection, which uses number of batches as an activity driver. The cost of each activity and usage of the activity drivers are as follows: Cost Usage by Product A Usage by Product B Design (Engineering Hours) $ 158,080 216 304 Machining (Machine Hours) $ 542,720 1,150 3,090 Inspection (Batches) $ 25,480 36 16 Walnut manufactures 10,900 units of Product A and 6,600 units of Product B per month. Each unit of Product A uses $40 of direct materials and $18 of direct labor, while each unit of Product B uses $74 of direct materials and $26 of direct labor. Required: a. Calculate the activity rate for design. b. Calculate the activity rate for machining. c. Calculate the activity rate for inspection. d. Determine the indirect costs assigned to Product A.
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.
Walnut Systems produces two different products, Product A, which sells for $127 per unit, and Product B, which sells for $209 per unit, using three different activities: Design, which uses Engineering Hours as an activity driver; Machining, which uses machine hours as an activity driver; and Inspection, which uses number of batches as an activity driver. The cost of each activity and usage of the activity drivers are as follows:
| Cost | Usage by Product A | Usage by Product B | ||||||
| Design (Engineering Hours) | $ | 158,080 | 216 | 304 | ||||
| Machining (Machine Hours) | $ | 542,720 | 1,150 | 3,090 | ||||
| Inspection (Batches) | $ | 25,480 | 36 | 16 | ||||
Walnut manufactures 10,900 units of Product A and 6,600 units of Product B per month. Each unit of Product A uses $40 of direct materials and $18 of direct labor, while each unit of Product B uses $74 of direct materials and $26 of direct labor.
Required:
a. Calculate the activity rate for design.
b. Calculate the activity rate for machining.
c. Calculate the activity rate for inspection.
d. Determine the indirect costs assigned to Product A.
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>There are various methods to allocate the overhead support costs that are not directly related to a product. |
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>Traditional method is the basic method of allocation, which is based on a generally on a single allocation base. |
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>Activity based costing method is modern approach, where overhead costs are divided into various cost pools, and each cost pool is assigned an activity driver. Based on this, the activity rates for each cost pool is calculated and overhead is assigned using those rates. |
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