Production-Based Costing versus Activity-Based Costing, Assigning Costs to Activities, Resource Drivers Willow Company produces lawn mowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the beginning of the year, the following data were prepared for this plant: Basic Model Deluxe Model Expected quantity 40,000 20,000 Selling price $180 $360 Prime costs $80 $160 Machine hours 5,000 5,000 Direct labour hours 10,000 10,000 1,500 4,500 250 500 1,200 4,800 Engineering support (hours) Receiving (orders processed) Materials handling (number of moves) Purchasing number of requisitions) Maintenance (hours used) Paying suppliers (invoices processed) Setting up equipment (number of setups) 100 200 1,000 3,000 250 500 16 64 Additionally, the following overhead activity costs are reported: $114,000 120,000 Maintaining equipment Engineering support Materials handling Setting up equipment ? 96,000 Purchasing materials 60,000 40,000 Receiving goods Paying suppliers 30,000 Providing space 20,000 Total $? Maintaining equipment $114,000 Engineering support 120,000 Materials handling ? 96,000 60,000 Setting up equipment Purchasing materials Receiving goods Paying suppliers Providing space 40,000 30,000 20,000 Total $ ? Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Materials handling uses three inputs: two forklifts, gasoline to operate the forklifts, and three operators. The three operators are paid a salary of $40,000 each. The operators spend 25 percent of their time on the receiving activity and 75 percent on moving goods (materials handling). Gasoline costs $3 per move. Depreciation amounts to $6,000 per forklift per year. Required: Round answers to two decimal places. 1. Calculate the cost of the materials handling activity. Label the cost assignments as driver tracing or direct tracing. Identify the resource drivers. Labour $ 90,000 Driver tracing with time as the resource driver 18,000 Driver tracing with moves as the resource driver Gasoline Depreciation 12,000 Direct tracing Total cost 120,000 2. Calculate the cost per unit for each product by using direct labour hours to assign all overhead costs. Basic per unit Deluxe per unit 3. Calculate activity rates. Maintenance per maintenance hour per engineering hour Engineering Materials handling $ per move 2. Calculate the cost per unit for each product by using direct labour hours to assign all overhead costs. Basic per unit Deluxe per unit 3. Calculate activity rates. Maintenance per maintenance hour Engineering $ per engineering hour Materials handling s per move Setting up s per setup Purchasing $ per requisition Receiving $ per order Paying suppliers s per invoice Providing space per machine hour Assign costs to each product. Round activity rates values in intermediate calculations to two decimal places and round final answers to the nearest dollar. Basic Deluxe Prime costs Overhead: Maintenance Engineering Materials handling Setting up Purchasing Receiving Paying suppliers Providing space Total Calculate a unit cost for each product. Prime costs Overhead: Maintenance Engineering Materials handling Setting up Purchasing Receiving Paying suppliers Providing space Total Calculate a unit cost for each product. Basic per unit Deluxe per unit Compare these costs with those calculated in Requirement 2. The input in the box below will not be graded, but may be reviewed and considered by your instructor. 4. Calculate consumption ratios for each activity. Basic Deluxe Maintenance Engineering Materials handling Setting up Purchasing III Receiving Basic per unit Deluxe per unit Compare these costs with those calculated in Requirement 2. The input in the box below will not be graded, but may be reviewed and considered by your instructor. 4. Calculate consumption ratios for each activity. Basic Deluxe Maintenance Engineering Materials handling Setting up Purchasing Receiving Paying suppliers Providing space 5. Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. The input in the box below will not be graded, but may be reviewed and considered by your instructor. Calculate the rates that would apply under this approach. Pool Rate Pool 1 per unit Pool 2 s per unit Pool 3 $ per unit Pool 4 s per unit
