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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

Casual Cuts Inc. has total estimated factory overhead for the year of $225,000, divided into four activities: cutting, $90,000; sewing, $22,500; setup, $80,000; and inspection, $32,500. Casual Cuts manufactures two types of men’s pants: jeans and khakis. The activity-base usage quantities for each product by each activity are as follows:

  Cutting Sewing Setup Inspection
Jeans 500 dlh 1,000 dlh 250 setups 100 inspections
Khakis 1,000 500 750 400
  1,500 dlh 1,500 dlh 1,000 setups 500 inspections

Each product is budgeted for 10,000 units of production for the year. Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.

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 CC.

Explanation

The activity rate for each activity of Company CC is:

  • Activity rate for cutting is $60 per dlh. (1)
  • Activity rate for sewing is $15 per dlh. (2)
  • Activity rate setup is $80 per setup. (3)
  • Activity rate for inspection is $65 per inspection. (4)

Working Note:

Calculate activity rate for cutting.

Cutting = Cost of CuttingNumber of labour hours$90,0001,500= $60 dlh

(1)

Calculate activity rate for sewing.

Sewing = Cost of SewingNumber of labour hours

b)

To determine
The factory overhead cost per unit for each product of Company CC using activity-based costing.

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