Can anyone help explain how to answer this question? I have tried to use the Activity Rate = Estimated Activity Cost / Estimated Activity Base Usage but still can not come up with the correct answers. Thank you in advance!
Activity-Based Costing Traditionally, overhead costs are assigned based arbitrarily on the rate of either direct labor or direct materials associated with production. This makes sense when companies only make a few products, production processes are simple, and overhead costs are less pervasive. However, today production processes are more complex, companies make a wider array of products, and fewer costs are directly traceable to units of production. To address this, companies use activity-based costing (ABC). Specifically, activity-based costing identies and traces costs and expenses to activities and then to specic products. ABC uses multiple factory overhead rates based on activities. Activities are the types of work, or actions, involved in a manufacturing process or seI activity. For example, assembly, inspection, and engineering design are activities. The estimated activity costs are allocated to products using an activity late. Activity rates are determined as follows: Activity Rate = Estimated Activity Cost/ Estimated Activity Base Usage Illustrated Example of Activity-Based Costing Comparing Two Products under Traditional and Acti ty-Based Costing Compare two projects under development by the same company. The following are a few aspects of each product's development process relevant to costs. Product S Product T Requires 4,000 hours of testing Requires 1,000 hours of testing Requires 5,250 units of computing power Requires 2,250 units of computing power Requires 30 developer hours to Implement Requires 70 developer hours to implement Cost Items cost of Each Activity Testin $24,800 Computing power: $37,200 Developer hourly cost: $11 per hour Traditional Costing Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use It as the basis for allocating overhead costs, such as computing power and testing. In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project. If required, round your answers to the nearest dollar. Product S Product T Percentage of developer hours 30% Percentage of developer hours 70% Tradltlonal Costlng Traditional costing would take the proportion of a direct cost, such as direct labor hours, and use it as the basis for allocating overhead costs, such as computing power and testing In the following table, use developer hours as the basis for assigning overhead costs (computing and developer costs) to each project If required, round your answers to the nearest dollar. Product 5 Product T Percentage of developer hours 30% Percentage of developer hours 70% Testing cost $- V Testing cost $- V Computing cost $- J Computing cost Developer cost $ J Developer cost Total cost Total cost Percentage of developer hours + Percentage of developer hours for Product 5 (30%) Allocation basis for Product S: The amount of labor hours associated directly with Product 5, as a percentage of all developer hours worked (regardless of product). The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product 5 under the traditional costing method. 30 (30+70) + Percentage of developer hours for Product T (70%) Allocatlon basls for Product T: The amount of labor hours associated directly with Product T, as a percentage of all developer hours worked (regardless of product)' The amounts for overhead to be allocated are multiplied by this value to determine the overhead to be assigned to Product T under the traditional costing method. 70 (30+70) Review the resources each product (5 and T) requires for production and compare that to the costs calculated above under traditional costing' Does traditional costing serve as an accumte gauge of costs? Nov/ Activity-Based Costing Using the data above for products S and T, calculate the costs using activity-based costing. Allocate the costs of testing, computing, and development based on the rates of activity consumed by each product's development process. if required In your computations, round per unit costs to the nearest cent. Round your final answers to the nearest dollar. Cost Activity Iase Testing Hours of testing Computing cost Units of computing power Developer cost Development hours Product S Product T Testing cost $ X Testing cost C Computing cost $ Computing cost SI Developer cost $ 330 V Developer cost 770 V Total cost Total cost $1 Feedbldx v 1 Check My Wotk The budgeted activity coals are assigned to products using factory overhead rates ior each activity. These rates are called activity rates because they are related to activities. Activity rates are detennlned as lollows: Activity Rate = Budgeted Activity Coat] Toial Activity Base Usage The poem are allocated to the product by multiplying the activitybase usage by the computed activity rate. Activity-based posting for varying batch production A manufacturing company has the following two activities associated with completion of products: 1. The setting up of machlnes for running batches of products 2. The actual production of units produced The company has annual manufacturing overhead costs of $2,000,000, of which $200,000 Is directly Involved In setting up machines for batch runs. During the year, the company expecm to perform 400 machine setups, one setup per batch for a total of 400 batches of production. Assume that the batch sizes vary considerably, but the work involved in setting up the machines is not appreciably different from one job to the next. If the company estimates that the $200,000 costs associated with setups will yield 400 setups this year, the cost associated directly with each setup will be per setup. Because each job will require Its own setup, setup costs are viewed as batch costs. Because $200,000 of the $2,000,000 are costs associated with setups, this means that costs associated directly with the production of units equal $
