4.7 Activity-Based And Department Rate Product Costing and Product Cost Distortions

Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows:

Indirect labor $507,000

Cutting Department 156,000

Finishing Department 192,000

Total $855,000

The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:

Activity Budgeted Activity Cost Activity Base

Production control $237,000 Number of production runs

Materials handling 270,000 Number of moves

Total $507,000

The activity-base usage quantities and units produced for the two products follow:

Number of Production Runs Number of Moves Direct Labor Hours-Cutting Direct Labor Hours-Finishing Units Produced

Snowboards 430 5,000 4,000 2,000 6,000

Skis 70 2,500 2,000 4,000 6,000

Total 500 7,500 6,000 6,000 12,000

Activity-Based And Department Rate Product Costing and Product Cost Distortions Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows: Indirect labor Cutting Department Finishing Department Total $507,000 155,000 192,000 $855,000 The activity base associated with the two production departments is direct labor hours, The Indirect labor can be assigned to two different activities as follows: Activity Production control Materials handling Total Budgeted Activity Cost $237,000 270,000 $507,000 Activity Base Number of production runs Number of moves The activity base usage quantities and units produced for the two products follow Direct Labor Hours- Cutting Number of Production Runs 430 70 500 Snowboards Skis Number of Moves 5,000 2,500 7,500 4,000 Direct Labor Hours- Finishing 2,000 4,000 6,000 Units Produced 6,000 6,000 12,000 2,000 6,000 Total Required: 1. Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is $315,000 and $540,000 for the Cutting and Finishing departments, respectively, Round per unit amounts to the nearest whole cont. Department Production Department Rate Cutting Department per direct labor hour Finishing Department per direct labor hour 2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). Round per unit amounts to the nearest whole cent. 2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). Round per unit amounts to the nearest whole cent. Product Total Factory Overhead Factory Overhead Per Unit Snowboards Skis 3. Determine the activity rates, assuming that the Indirect labor is associated with activities rather than with the production departments, Round per unit amounts to the nearest who cent. Activity Activity Rate Production Control per prod.run Materials Handling per move Cutting Department per din Finishing Department per din 4. Determine the total and per-unit cost assigned to each product under activity-based costing. Round the per unit amounts to the nearest whole cent. Product Total Activity Cost Activity Cost Per Unit Snowboards Skis