Question

Bob Randall, cost accounting manager for Hemple Products, was asked to determine the costs of the activities performed within the company's Manufacturing Engineering Department. The department has the following activities: creating bills of materials (BOMs), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tools. The resource costs (from the general ledger) and the times to perform one unit of each activity are provided below.

Resource Costs			Activities	Unit Time		Driver
Salaries	$347,000		Creating BOMs	0.7 hr.		No. of BOMs
Equipment	98,000		Designing tools	2.1 hrs.		No. of tool designs
Supplies	35,000		Improving processes	1.1 hrs.		Process improvement hrs.
Total	$480,000		Training employees	1.9 hrs.		No. of training sessions
			Studying capabilities	1.9 hrs.		Study hours

Total machine and labor hours (at practical capacity):

Machine hours		2,000
Engineering hours		18,000
Total hours		20,000

The activity, designing tools, uses the number of tools designed as the activity driver. Using a traditional approach, the cost of the designing tools activity was determined to be $186,000 with an expected activity output of 1,000 for the coming year. During the first week of the year, two jobs (Job 150 and Job 151) had a demand for 10 and 20 new tools, respectively.

Required:

1. Calculate the capacity cost rate for the Manufacturing Engineering Department. Round your answer to the nearest cent.
$ per hour

2. Using the capacity cost rate, determine the activity rates for each activity. Round your answers to the nearest cent.

	Activity Rates
Creating BOMs	$	per BOM
Designing tools	$	per tool design
Improving processes	$	per process improvement hr.
Training employees	$	per training session
Studying capabilities	$	per study hour

3. Calculate the cost of designing tools that would be assigned to each job using the TDABC-derived activity rate and then repeat using the traditional ABC rate.

	Job 150	Job 151
TDABC	$	$
ABC	$	$

4. Now suppose that time for creating BOMs is 0.7 for a standard product but that creating a BOM for a custom product adds an additional 0.5 hour. Express the time equation for this added complexity. Round your answers to two decimal places. Place the amounts left to right, lowest to highest.

BOM time

=

+

Calculate the activity rate for the activity of creating a BOM for custom products. Round your answer to the nearest cent.
$ per BOM

Answer 1

1. Capacity cost rate for the Manufacturing Engineering Department
Total costs	480000
Total time in hrs.	20000
Capacity cost rate(480000/20000)	24
Particulars	Unit Time	Activity Rates
Creating BOMs	0.7	24*0.7	16.8	per BOM
Designing tools	2.1	24*2.1	50.4	per tool design
Improving processes	1.1	24*1.1	26.4	per process improvement hr.
Training employees	1.9	24*1.9	45.6	per training session
Studying capabilities	1.9	24*1.9	45.6	per study hour
3. Cost of designing tools using the TDABC-derived activity rate and traditional ABC rate
	Job 150		Job 151
TDABC	50.4*10=	504	50.4*20	1008
ABC at the activity rate of 186000/1000=186	186*10=	1860	186*20	3720
4.   BOM time =	(0.7+0.5)*No.of BOMs= 1.2* BOM
Activity rate for the activity of creating a BOM for custom products.	24*1.2=	28.8	$ per BOM