question archive Computing Product Costs Using Activity-Based Costing
Computing Product Costs Using Activity-Based Costing
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Computing Product Costs Using Activity-Based Costing. Ralston Company identified the following activities, estimated costs for each activity, and identified cost drivers for each activity for this coming year. (These are the first three steps of activity-based costing.) Cost Driver Estimated Annual Overhead Costs Activity Production setup Materials handling Quality control Number of production runs Yards of material purchased Number of inspections $ 60,000 140,000 80,000 $ 280,000 Estimated Annual Cost Driver Activity 100 production runs 10,000 yards purchased 800 inspections Total The company produces two products, MX1 and MX2. Information about these products for the month of July follows:
MX1 MX2 Direct materials cost per unit Direct labor cost per unit Overhead cost per unit Product cost per unit Units produced S20 15 ? S 30 45 2 $ ? $ 700 units 51.000 units Actual cost driver activity levels for the month of July are as follows: MX1 MX2 Number of production runs Yards of material purchased Number of inspections 3 550 40 6 230 10 Required: a. Using the estimates for the year, compute the predetermined overhead rate for each activity (this is step 4 of the activity-based costing process). b. Using the activity rates calculated in requirement a and the actual cost driver activity levels shown for July, allocate overhead to the two products for the month of July (this is step 5 of the activity-based costing process). c. For each product, calculate the overhead cost per unit for the month of July. Round results to the nearest cent. d. For each product, calculate the product cost per unit for the month of July, Round results to the nearest cent.
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Solution a):-
Using the Estimate for the Year, Compute the predetermined overhead rate for each activity:-
| Activity | Cost Driver | Estimated Annual Overhead Costs | Estimated Annual Cost Driver Activity | Cost per Activity |
| Production Setup | No.of Production Runs | 60,000.00 | 100 Production Runs | 600.00 |
| Materials Handling | Yards of Material Purchased | 140,000.00 | 10,000 yards purchased | 14.00 |
| Quality Control | No.of Inspections | 80,000.00 | 800 inspections | 100.00 |
| Total | 280,000.00 |
Solution b):-
Using the Activity rates calculated in requirement (a) and the Actual Cost driver activity levels shown for July, allocate overheads to the TWO Products for the month of July:-
| S.No | Particulars | MX 1 | MX 2 |
| No.of Production runs (given) | 3.00 | 6.00 | |
| Cost per Production run | 600.00 | 600.00 | |
| d1 | Total | 1,800.00 | 3,600.00 |
| Yards of Material Purchased (given) | 550.00 | 230.00 | |
| Cost per Material Activity | 14.00 | 14.00 | |
| d2 | Total | 7,700.00 | 3,220.00 |
| No.of Inspections (given) | 40.00 | 10.00 | |
| Cost per Inspection | 100.00 | 100.00 | |
| d3 | Total | 4,000.00 | 1,000.00 |
| Total Overheads (d1+d2+d3) | 13,500.00 | 7,820.00 |
Solution c):-
For Each Product calculate the overhead cost p.u. for the month of July:-
| S.No | Particulars | MX 1 | MX 2 |
| No.of Production runs (given) | 3.00 | 6.00 | |
| Cost per Production run | 600.00 | 600.00 | |
| d1 | Total | 1,800.00 | 3,600.00 |
| Yards of Material Purchased (given) | 550.00 | 230.00 | |
| Cost per Material Activity | 14.00 | 14.00 | |
| d2 | Total | 7,700.00 | 3,220.00 |
| No.of Inspections (given) | 40.00 | 10.00 | |
| Cost per Inspection | 100.00 | 100.00 | |
| d3 | Total | 4,000.00 | 1,000.00 |
| Total Overheads (d1+d2+d3) | 13,500.00 | 7,820.00 | |
| Units Produced | 1,000.00 | 700.00 | |
| Overhead Cost p.u. | 13.50 | 11.17 |
Solution d):-
For Each Product calculate the Product cost p.u. for the month of July:-
| S.No | Particulars | MX 1 | MX 2 |
| a | Units Produced | 1,000.00 | 700.00 |
| b | Direct Materials Cost p.u. | 20.00 | 30.00 |
| c | Direct Labour Cost p.u. | 15.00 | 45.00 |
| d | Overheads:- | ||
| No.of Production runs (given) | 3.00 | 6.00 | |
| Cost per Production run | 600.00 | 600.00 | |
| d1 | Total | 1,800.00 | 3,600.00 |
| Yards of Material Purchased (given) | 550.00 | 230.00 | |
| Cost per Material Activity | 14.00 | 14.00 | |
| d2 | Total | 7,700.00 | 3,220.00 |
| No.of Inspections (given) | 40.00 | 10.00 | |
| Cost per Inspection | 100.00 | 100.00 | |
| d3 | Total | 4,000.00 | 1,000.00 |
| Total Overheads (d1+d2+d3) | 13,500.00 | 7,820.00 | |
| e | Product Cost p.u. [(a*b)+(a*c)+d) | 48,500.00 | 60,320.00 |
| f | Product Cost p.u. (e/a) | 48.50 | 86.17 |
