Activity-Based And Department RateProduct Costingand Product Cost Distortions

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

Indirect labor$507,000Cutting Department156,000Finishing Department192,000Total$855,000Theactivity baseassociated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:

ActivityBudgeted Activity CostActivity BaseProduction control$237,000Number of production runsMaterials handling270,000Number of movesTotal$507,000The activity-base usage quantities and units produced for the two products follow:

Number of Production RunsNumber of MovesDirect Labor Hours-CuttingDirect Labor Hours-FinishingUnits ProducedSnowboards4305,0004,0002,0006,000Skis702,5002,0004,0006,000Total5007,5006,0006,00012,000Required:

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.

DepartmentProduction Department RateCutting Department$per direct labor hourFinishing Department$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.

ProductTotal Factory OverheadFactory Overhead Per UnitSnowboards$$Skis$$

3.Determine theactivity 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.

ActivityActivity RateProduction Control$per prod. runMaterials Handling$per moveCutting Department$per dlhFinishing Department$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.

ProductTotal Activity CostActivity Cost Per UnitSnowboards$$Skis$$

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

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

. The

method does not show this because all factory overhead is assumed to be proportional to direct labor hours. The

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