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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

Southeastern Paper Company manufactures three products (computer paper, newsprint, and specialty paper) 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 $220,000
Setup 117,000
Moving 21,000
Shipping 105,000
Product engineering 102,000
Total $565,000

The activity bases identified for each activity are as follows:

Activity Activity Base
Production Machine hours
Setup Number of setups
Moving Number of moves
Shipping Number of customer orders
Product engineering Number oftest runs

Tlıe 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 Moves Number of Customer Orders Number of Test Runs Units
Computer paper 400 80 230 310 50 1,000
Newsprint 500 30 70 140 15 1,250
Specialty paper 200 150 300 550 105 500
Total 1,100 260 600 1,000 170 2,750

Each product requires 0.4 machine hour per unit.

Instructions

  1. 1. Determine the activity rate for each activity.
  2. 2. Determine the total and per-unit activity cost for all three products.
  3. 3. Why aren’t the activity unit costs equal across all three products, since they require the same machine time per unit?

1.

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.

The activity rate for each activity of Company SP.

Explanation

Calculate the activity rate for each activity of Company SP.

ActivityActivity CostActivity-BaseActivity Rate
Production$220,0001,100 mh$200/mh
Setup$117,000450 setups$450/setup
Moving$21,000

2.

To determine

The total and per unit activity cost for each product of Company SP.

3.

To determine

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

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