Activity-based department rate product costing and product cost distortions

Instructions

Amount Descriptions

Factory Overhead Rates

Factory Overhead Costs

Activity Table - Receivers

Activity Table - Loudspeakers

Final Question

X

Instructions

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

1	Indirect labor	$400,400.00
2	Subassembly Department	198,800.00
3	Final Assembly Department	114,800.00
4	Total	$714,000.00

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:

1	Activity	Budgeted Activity Cost	Activity Base
2	Setup	$138,600.00	Number of setups
3	Quality control	261,800.00	Number of inspections
4	Total	$400,400.00

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

	Number of	Number of	Direct Labor Hours	Direct Labor Hours
	Setups	Inspections	Subassembly	Final 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.* **

2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1).* **

	Complete the Activity Tables for Receivers and Loudspeakers.
	3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments.*
	4. Determine the total and per-unit cost assigned to each product under activity-based costing.*
	5. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods.

* If required, round your answers to two decimal places.

** Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.

Amount Descriptions

Direct materials

Final Assembly Department

Loudspeakers

Quality Control

Receivers

Setup

Subassembly Department

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. If required, round your answers to two decimal places. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.

1	Department	Production Department Rate
2			per direct labor hour
3			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). If required, round your answers to two decimal places. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.

1	Product	Total Factory Overhead	Factory Overhead Per Unit
2
3

Complete the Activity Tables for Receivers and Loudspeakers.

	3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments.*
	4. Determine the total and per-unit cost assigned to each product under activity-based costing.*
	* If required, round your answers to two decimal places.

	Receivers
Activity	Activity-		Activity		Activity
	Usage	X	Rate	=	Cost
Setup
Quality Control
Subassembly Department
Final Assembly Department
Total
Number of units
Activity cost per unit

Complete the Activity Table for Loudspeakers.

	3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments.*
	4. Determine the total and per-unit cost assigned to each product under activity-based costing.*
	* If required, round your answers to two decimal places.

	Loudspeakers
Activity	Activity-		Activity		Activity
	Usage	X	Rate	=	Cost
Setup
Quality control
Subassembly Dept.
Final Assembly Dept.
Total
Number of units
Activity cost per unit

5. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods. Check all that apply.

The activity-based overhead allocation reveals that receivers are more costly on a per-unit basis than are the loudspeakers.

The multiple production department factory overhead rate method distorts the unit costs.

Loudspeakers have fewer setups and inspection activities than do receivers, so receivers have higher activity costs per unit.

The activity-based method separately accounts for the setup and quality-control activity costs, decreasing cost distortion.