Activity-Based Department Rate Product Costing and Product Cost Distortions

Big Sound Inc. manufactures two products: receivers and loudspeakers. The factory overhead incurred is as follows:

Indirect labor $400,400

Subassembly Department 198,800

Final Assembly Department 114,800

Total $714,000

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

Setup $138,600 Number of setups

Quality control 261,800 Number of inspections

Total $400,400

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

Number of Setups Number of Inspections Direct Labor HoursSubassembly Direct Labor HoursFinal Assembly Units Produced

Receivers 80 450 875 525 7,000

Loudspeakers 320 1,750 525 875 7,000

Total 400 2,200 1,400 1,400 14,000

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 $420,000 and $294,000 for the Subassembly and Final Assembly departments, respectively.

Department Production Department Rate

Subassembly Department $fill in the blank 1 per direct labor hour

Final Assembly Department $fill in the blank 2 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

Receivers $fill in the blank 3 $fill in the blank 4

Loudspeakers $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

Setup $fill in the blank 7 per setup

Quality Control $fill in the blank 8 per inspection

Subassembly Department $fill in the blank 9 per direct labor hour

Final Assembly Department $fill in the blank 10 per direct labor hour

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

Receivers $fill in the blank 11 $fill in the blank 12

Loudspeakers: $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 loudspeakers are

costly on a per-unit basis than are the receivers. The multiple production department rate method determines that the per-unit factory overhead is

for the two products. The multiple production department factory overhead rate method

distort the unit costs because all factory overhead is assumed to be

to direct labor hours. Loudspeakers have

setups and inspection activities than do receivers. Thus, loudspeakers have

activity costs per unit than do receivers.