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	$fill in the blank 3	$fill in the blank 4
Skis	$fill in the blank 5	$fill in the blank 6

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	$fill in the blank 7 per prod. run
Materials Handling	$fill in the blank 8 per move
Cutting Department	$fill in the blank 9 per dlh
Finishing Department	$fill in the blank 10 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	$fill in the blank 11	$fill in the blank 12
Skis	$fill in the blank 13	$fill in the blank 14

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

snowboards or skis

consume more factory overhead on a per-unit basis than do

snowboards or skis

. The

activity-based or 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 or multiple production department factory overhead rate

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.