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

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 cent.

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.

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 whole cent.

Activity	Activity Rate
Production Control	$ per prod. run
Materials Handling	$ per move
Cutting Department	$ per dlh
Finishing Department	$ per dlh

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	$	$

5. Comment on the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods.

The activity-based overhead allocation reveals that snowboard consume more factory overhead on a per-unit basis than do skis. The multiple production department factory overhead rate method does not show this because all factory overhead is assumed to be proportional to direct labor hours. The activity-based method separately accounts for the production control and materials handling activity costs. Snowboards have more production control and materials handling activities than do skis. This is because snowboards are made in smaller lots, representing a wide variety of styles. Thus, snowboards have higher activity costs per unit than skis.