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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Activity-based costing

Zeus Industries manufactures two types of electrical power units, custom and standard, which involve four factory overhead activities—production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated activity costs and activity hases for these activities:

Activity Activity Cost Activity Base
Production setup $ 44,000 Number of setups
Procurement 13,500 Number of purchase orders {PO)
Quality control 97,500 Number of inspections
Materials management 84,000 Number of components
Total 5239,000  

The activity-base usage quantities for each product are as follows:

  Setups Purchase Orders Inspections Components Unit Volume
Custom 290 760 1.200 500 2.000
Standard 110 140 300 200 2,000
Total 400 900 1.500 700 4,000

a. Determine an activity rate for each activity.

b. Assign activity costs to each product and determine the unit activity cost, using the activity rates from part (a).

c. Assume that each product required one direct labor hour per unit. Determine the per-unit cost if factory overhead is allocated on the basis of direct labor hours.

d. Explain why the answers in parts (b) and (c) are different.

a)

To determine

Activity-Based Costing: Activity-Based Costing refers to the allocation of the factory overheads when there are numerous products and processes. Activity-based costing aims at assigning the costs among the products in a proportionate way.

To Determine: The activity rate for each activity of Company ZI.

Explanation

Calculate the activity rate for each activity of Company ZI.

Activity Activity Cost Activity-Base Activity Rate
Production Setup $4,400 400 setup $110
Procurement $13,500 900 per order...

b)

To determine
The total and per unit activity cost for each product of Company ZI.

c)

To determine
The per unit activity cost for each product of Company ZI, if factory overhead is allocated on direct labor hour basis.

d)

To determine

To Explain: The reason for difference in the cost as per the above said two methods.

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