Product costs using activity rates

Hercules Inc. manufactures elliptical exercise machines and treadmills. The products are produced in its Fabrication and Assembly production departments. In addition to production activities, several other activities are required to produce the two products. These activities and their associated activity rates are as follows:

Activity	Activity Rate
Fabrication	$28	per machine hour
Assembly	$31	per direct labor hour
Setup	$87	per setup
Inspecting	$17	per inspection
Production scheduling	$16	per production order
Purchasing	$7	per purchase order

The activity-base usage quantities and units produced for each product were as follows:

Activity Base	Elliptical Machines	Treadmill
Machine hours	800		550
Direct labor hours	210		263
Setups	37		37
Inspections	24		33
Production orders	50		40
Purchase orders	393		164
Units produced	540		350

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the question below.

Open spreadsheet

Use the activity rate and usage information to calculate the total activity cost and activity cost per unit for each product. If required, round the per unit answers to the nearest cent.

	Total Activity Cost	Activity Cost Per Unit
Elliptical Machines	$fill in the blank 2	$fill in the blank 3
Treadmill	$fill in the blank 4	$fill in the blank 5

Multiple Production Department Factory Overhead Rate Method

Handy Leather, Inc., produces three sizes of sports gloves: small, medium, and large. A glove pattern is first stenciled onto leather in the Pattern Department. The stenciled patterns are then sent to the Cut and Sew Department, where the glove is cut and sewed together. Handy Leather uses the multiple production department factory overhead rate method of allocating factory overhead costs. Its factory overhead costs were budgeted as follows:

Pattern Department overhead	$112,000
Cut and Sew Department overhead	185,000
	Total	$297,000

The direct labor estimated for each production department was as follows:

Pattern Department	2,000	direct labor hours
Cut and Sew Department	2,500
	Total	4,500	direct labor hours

Direct labor hours are used to allocate the production department overhead to the products. The direct labor hours per unit for each product for each production department were obtained from the engineering records as follows:

Production Departments	Small Glove	Medium Glove	Large Glove
Pattern Department	0.04		0.05		0.06
Cut and Sew Department	0.07		0.09		0.11
Direct labor hours per unit	0.11		0.14		0.17

If required, round all per unit answers to the nearest cent.

a. Determine the two production department factory overhead rates.

Pattern Department	$fill in the blank 1per dlh
Cut and Sew Department	$fill in the blank 2per dlh

b. Use the two production department factory overhead rates to determine the factory overhead per unit for each product.

Small glove	$fill in the blank 3 per unit
Medium glove	$fill in the blank 4 per unit
Large glove	$fill in the blank 5 per unit

Single plantwide factory overhead rate

Bach Instruments Inc. makes three musical instruments: flutes, clarinets, and oboes. The budgeted factory overhead cost is $116,480. Overhead is allocated to the three products on the basis of direct labor hours. The products have the following budgeted production volume and direct labor hours per unit:

	Budgeted Production Volume	Direct Labor Hours Per Unit
Flutes	2,500	units	0.8
Clarinets	700		1.5
Oboes	1,300		1.1

If required, round all per unit answers to the nearest cent.

a. Determine the single plantwide overhead rate. $fill in the blank 1 per direct labor hour

b. Use the overhead rate in (a) to determine the amount of total and per-unit overhead allocated to each of the three products.

	Total Factory Overhead Cost	Per Unit Factory Overhead Cost
Flutes	$fill in the blank 2	$fill in the blank 3
Clarinets	fill in the blank 4	fill in the blank 5
Oboes	fill in the blank 6	fill in the blank 7
Total	$fill in the blank 8

Activity rates and product costs using activity-based costing

Lonsdale Inc. manufactures entry and dining room lighting fixtures. Five activities are used in manufacturing the fixtures. These activities and their associated budgeted activity costs and activity bases are as follows:

Activity	Budgeted Activity Cost		Activity Base
Casting	$496,000		Machine hours
Assembly	112,000		Direct labor hours
Inspecting	42,000		Number of inspections
Setup	57,000		Number of setups
Materials handling	28,500		Number of loads

Corporate records were obtained to estimate the amount of activity to be used by the two products. The estimated activity-base usage quantities and units produced follow:

Activity Base	Entry	Dining	Total
Machine hours	5,050		10,950		16,000
Direct labor hours	4,200		2,800		7,000
Number of inspections	210		790		1,000
Number of setups	360		240		600
Number of loads	640		310		950
Units produced	2,100		3,900		6,000

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

Determine the activity rate for each activity. If required, round the rate to the nearest dollar.

Activity	Activity Rate
Casting	$ fill in the blank 2	per machine hour
Assembly	$ fill in the blank 3	per direct labor hour
Inspecting	$ fill in the blank 4	per inspection
Setup	$ fill in the blank 5	per setup
Materials handling	$ fill in the blank 6	per load

Use the activity rates in (a) to determine the total and per-unit activity costs associated with each product. Round the per unit rates to the nearest cent.

Product	Total Activity Cost	Activity Cost Per Unit
Entry Lighting Fixtures	$ fill in the blank 7	$ fill in the blank 8
Dining Room Lighting Fixtures	$ fill in the blank 9	$ fill in the blank 10

Activity-based costing for a service company

Crosswinds Hospital plans to use activity-based costing to assign hospital indirect costs to the care of patients. The hospital has identified the following activities and activity rates for the hospital indirect costs:

Activity		Activity Rate
Room and meals	$230		per day
Radiology	$215		per image
Pharmacy	$40		per physician order
Chemistry lab	$90		per test
Operating room	$1,050		per operating room hour

The activity usage information associated with the two patients is as follows:

	Abel Putin	Cheryl Umit
Number of days	6	days	2	days
Number of images	5	images	3	images
Number of physician orders	5	orders	3	orders
Number of tests	6	tests	4	tests
Number of operating room hours	7	hours	3	hours

This information has been collected in the Microsoft Excel Online file. Open the spreadsheet, perform the required analysis, and input your answers in the questions below.

Open spreadsheet

Determine the activity cost associated with each patient.

Abel Putin	$fill in the blank 2
Cheryl Umit	$fill in the blank 3

Why is the total activity cost different for the two patients?

Abel PutinCheryl Umit

1. apparently had a different condition that required more extensive treatment. Thus, the activity cost to is more than the activity cost of the other patient.

Abel PutinCheryl Umit