Exercise C: Activity-Based Costing

Erte, Inc. has the following predicted indirect costs and cost drivers for 2017 for the given activity cost pools:

	Manufacture Department	Finishing Department	Cost Driver
Maintenance	$30,000	$15,000	Machine hours
Materials handling	$40,000	$25,000	Material moves
Machine setups	$80,000	$5,000	Machine setups
Inspections	$0	$20,000	Inspection hours
Total	150,000	$65,000

The following activity predictions were also made for the year:

	Manufacture Department	Finishing Department
Machine hours	15,000	8,000
Materials moves	5,000	3,500
Machine setups	900	150
Inspection hours	0	3,000

It is assumed that the cost per unit of activity for a given activity does not vary between departments. The companys president is trying to evaluate the companys product mix strategy regarding two of its four product models, K200 and V400. The company has been using a company-wide overhead rate based on machine hours but is considering switching to either department rates or activity-based rates. The production manager has provided the following data for the production of a batch of 150 units for each of these models:

	K200	V400
Direct materials cost	$15,000	$22,000
Direct labor cost	$7,000	$6,000
Machine hours (Manufacture)	700	900
Machine hours (Finishing)	400	300
Materials moves	60	80
Machine setups	9	12
Inspection hours	60	80

Required:

1. Determine the cost of one unit each of K200 and V400, assuming a company-wide overhead rate is used based on total machine hours.
2. Determine the cost of one unit each of K200 and V400, assuming department overhead rates are used. Overhead is assigned based on machine hours in both departments.
3. Determine the cost of one unit each of K200 and V400, assuming activity-based overhead rates are used for maintenance handling, machine setup, and inspection activities.