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 labor hours	10,000	10,000
Engineering support (hours)	1,500	4,500
Receiving (orders processed)	250	500
Materials handling (number of moves)	1,200	4,800
Purchasing (number of requisitions)	100	200
Maintenance (hours used)	1,000	3,000
Paying suppliers (invoices processed)	250	500
Setting up equipment (number of setups)	16	64

Additionally, the following overhead activity costs are reported:

Maintaining equipment	$114,000
Engineering support	120,000
Materials handling	?
Setting up equipment	96,000
Purchasing materials	60,000
Receiving goods*	40,000
Paying suppliers	30,000
Providing space	20,000
Total	$ ?

* Receiving activity cost includes allocated share of forklift operators salaries.

Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Receiving and materials handling use three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of $40,000 each. The operators spend 25% of their time on the receiving activity and 75% on moving goods (materials handling). Gasoline costs $3 per move. Depreciation amounts to $8,000 per forklift per year.

Required:

(Note: 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.

	Costs	Resource Drivers
Labor	$fill in the blank 4f679006f05504b_1	Direct tracingDriver tracing with timeDriver tracing with moves
Gasoline	fill in the blank 4f679006f05504b_3	Direct tracingDriver tracing with timeDriver tracing with moves
Depreciation	fill in the blank 4f679006f05504b_5	Direct tracingDriver tracing with timeDriver tracing with moves
Total Cost	$fill in the blank 4f679006f05504b_7

2. Calculate the cost per unit for each product by using direct labor hours to assign all overhead costs. (Round your answers to two decimal places.)

Plantwide overhead rate: $fill in the blank f4eb3802f07006f_1 per DLH

Basic:	$fill in the blank f4eb3802f07006f_2 overhead cost per unit
Deluxe:	$fill in the blank f4eb3802f07006f_3 overhead cost per unit

3. Calculate activity rates and assign costs to each product. Calculate a unit cost for each product, and compare these costs with those calculated in Requirement 2. (Round acitivity rates and unit costs to two decimal places and all other answers to the nearest whole dollar value.)

Note: Be sure to complete both tables below before answering the following question:

The

ABCtraditional

costs are a closer representation of actual resource consumption.

Activity rates:
Maintenance	$fill in the blank fb8fe4fedff5069_2 per maintenance hour
Engineering	$fill in the blank fb8fe4fedff5069_3 per engineering hour
Materials handling	$fill in the blank fb8fe4fedff5069_4 per move
Setting up	$fill in the blank fb8fe4fedff5069_5 per setup
Purchasing	$fill in the blank fb8fe4fedff5069_6 per requisition
Receiving	$fill in the blank fb8fe4fedff5069_7 per order processed
Paying suppliers	$fill in the blank fb8fe4fedff5069_8 per invoice processed
Providing space	$fill in the blank fb8fe4fedff5069_9 per machine hour

Cost Assignment
	Basic			Deluxe
Prime costs	$fill in the blank fb8fe4fedff5069_10			$fill in the blank fb8fe4fedff5069_11
Overhead costs:
Maintenance	fill in the blank fb8fe4fedff5069_12			fill in the blank fb8fe4fedff5069_13
Engineering	fill in the blank fb8fe4fedff5069_14			fill in the blank fb8fe4fedff5069_15
Materials handling	fill in the blank fb8fe4fedff5069_16			fill in the blank fb8fe4fedff5069_17
Setting up	fill in the blank fb8fe4fedff5069_18			fill in the blank fb8fe4fedff5069_19
Purchasing	fill in the blank fb8fe4fedff5069_20			fill in the blank fb8fe4fedff5069_21
Receiving	fill in the blank fb8fe4fedff5069_22			fill in the blank fb8fe4fedff5069_23
Paying suppliers	fill in the blank fb8fe4fedff5069_24			fill in the blank fb8fe4fedff5069_25
Providing space	fill in the blank fb8fe4fedff5069_26			fill in the blank fb8fe4fedff5069_27
Total manufacturing costs	$fill in the blank fb8fe4fedff5069_28			$fill in the blank fb8fe4fedff5069_29
Units produced	$fill in the blank fb8fe4fedff5069_30			$fill in the blank fb8fe4fedff5069_31
Unit cost (ABC)	$fill in the blank fb8fe4fedff5069_32			$fill in the blank fb8fe4fedff5069_33
Unit cost (traditional)	$fill in the blank fb8fe4fedff5069_34			$fill in the blank fb8fe4fedff5069_35

4. Calculate consumption ratios for each activity. (Round your answers to two decimal places.)

	Basic			Deluxe
Maintenance	fill in the blank 8434b805b005fb7_1			fill in the blank 8434b805b005fb7_2
Engineering	fill in the blank 8434b805b005fb7_3			fill in the blank 8434b805b005fb7_4
Materials handling	fill in the blank 8434b805b005fb7_5			fill in the blank 8434b805b005fb7_6
Setting up	fill in the blank 8434b805b005fb7_7			fill in the blank 8434b805b005fb7_8
Purchasing	fill in the blank 8434b805b005fb7_9			fill in the blank 8434b805b005fb7_10
Receiving	fill in the blank 8434b805b005fb7_11			fill in the blank 8434b805b005fb7_12
Paying suppliers	fill in the blank 8434b805b005fb7_13			fill in the blank 8434b805b005fb7_14
Providing space	fill in the blank 8434b805b005fb7_15			fill in the blank 8434b805b005fb7_16

5. CONCEPTUAL CONNECTION Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. (a) Complete the statement below regarding when products consume activities.

When products consume activities in

the same proportionvarying proportions

, the activities can be combined into

a single overhead rateone poola single activity driver

. Using these consumption ratios as a guide, we create

onefoureight

pools.

(b) Calculate the rates that would apply under this approach. (Round to two decimal places.)

Overhead rate 1Pool 1Activity Driver 1	$fill in the blank e1187d053f9ff98_5 per unit
Overhead rate 2Pool 2Activity Driver 2	$fill in the blank e1187d053f9ff98_7 per unit
Overhead rate 3Pool 3Activity Driver 3	$fill in the blank e1187d053f9ff98_9 per unit
Overhead rate 4Pool 4Activity Driver 4	$fill in the blank e1187d053f9ff98_11 per unit