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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

Pure Cane Sugar Company manufactures three products (while 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 Activity Costs
Production $247,500
Setup 48,000
Inspection 12,500
Shipping 69,300
Customer service 27,600
Total $404,900

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 as follows:

 

Machine

Hours

Number of Setups Number of Inspections Number of Customer Orders

Customer

Service

Requests

Units
White sugar 2,000 50 100 410 25 8,000
Brown sugar 1,250 70 160 1,100 200 5,000
Powdered sugar 1,250 80 240 800 120 5,000
Total 4,500 200 500 2,310 345 18.000

Each product requires 0.25 machine hour per unit.

Instructions

1. Determine the activity rate for each activity.

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

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

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 PCS.

Explanation

Calculate the activity rate for each activity of Company PCS.

Activity Activity Cost Activity-Base Activity Rate
Production $247,500 4,500 mh $55
Setup $48,000 200 setups $240
Inspectio...

b)

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

c)

To determine

To Explain: The reason for the difference in activity unit cost for each product of Company PCS, as they require the same machine time per unit.

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