Activity$-$based costing and product cost distortion

Crenshaw Inc. is considering a change to activity$-$based product costing. The company produces two products, cell phones and tablet PCs$,$ in a single production department. The production department is estimated to require $2,000$ direct labor hours. The total indirect labor for the department is budgeted to be $$480,000.$

Time records from indirect labor employees revealed that they spent $30\%$ of their time setting up production runs and $70\%$ of their time supporting actual production.

The following information about cell phones and tablet PCs was determined from the corporate records:

Product Number of

Setups Direct Labor

Hours Units

Cell phones $1,2001,00080,000$

Tablet PCs $2,8001,00080,000$

Total $4,0002,000160,000$

If required, round all per unit answers to the nearest cent.

a$.$ Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.

Cell phones fill in the blank $1$ of $2$$

$3$

per unit

Tablet PCs fill in the blank $2$ of $2$

$3$

per unit

b$.$ Determine the budgeted activity costs and activity rates for the indirect labor under activity$-$based costing. Assume two activities$$one for setup and the other for production support.

Activity Budgeted Activity Cost Activity Rate

Setup fill in the blank $1$ of $4$$

$60,000$

fill in the blank $2$ of $4$$

per setup

Production support fill in the blank $3$ of $4$$

$140$

fill in the blank $4$ of $4$$

per direct labor hour

c$.$ Determine the activity cost per unit for indirect labor allocated to each product under activity$-$based costing.

Cell phones fill in the blank $1$ of $2$$

$2\mathrm{.}64$

per unit

Tablet PCs fill in the blank $2$ of $2$

$3\mathrm{.}36$

per unit

d$.$ Why are the per$-$unit allocated costs in $($a$)$ different from the per$-$unit activity cost assigned to the products in $($c$)?$

The per$-$unit indirect labor costs in $($a$)$ are distorted because fill in the blank $1$ of $6$

is consumed by the products in a different ratio from the direct labor. The fill in the blank $2$ of $6$

costing method properly allocates the setup$-$related activity so that the fill in the blank $3$ of $6$

receive a larger portion of the setup activity cost. The fill in the blank $4$ of $6$

allocates overhead only on the basis of direct labor hours. Since the direct labor hours fill in the blank $5$ of $6$

equal for each product, the allocated indirect labor will also fill in the blank $6$ of $6$

equal.