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 more costly on a per-unit basis than are the receivers. The multiple production department rate method determines that the per-unit factory overhead is nearly the same for the two products. The multiple production department factory overhead rate method does distort the unit costs because all factory overhead is assumed to be proportional to direct labor hours. Loudspeakers have more setups and inspection activities than do receivers. Thus, loudspeakers have higher activity costs per unit than do receivers.