Question

1. Activity-Based Costing and Product Cost Distortion

   Digital Storage Concept Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 4,000 direct labor hours. The total indirect labor is budgeted to be $662,400.

   Time records from indirect labor employees revealed that they spent 60% of their time setting up production runs and 40% of their time supporting actual production.

   The following information about cell phones and tablet PCs was determined from the corporate records:

   		Number of Setups			Direct Labor Hours			Units
   Cell phones			1,600			2,000			92,000
   Tablet PCs			800			2,000			92,000
   	Total		2,400			4,000			184,000

   If required, round your answers to the nearest cent.

   a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.

   Cell phones	$fill in the blank 1 per unit
   Tablet PCs	$fill in the blank 2 per unit

   b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.

   	Budgeted Activity Cost	Activity Rate
   Setup	$fill in the blank 3	$fill in the blank 4	per setup
   Production support	$fill in the blank 5	$fill in the blank 6	per direct labor hour

   c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.

   Cell phones	$fill in the blank 7 per unit
   Tablet PCs	$fill in the blank 8 per unit

Answer 1

a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.

Cell phones	662400*2/4/92000 = 3.60
Tablet PCs	$3.60

b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.

	Budgeted Activity Cost	Activity Rate
Setup	397440	397440/2400 = 165.60 per setup
Production support	264960	264960/4000 = 66.24 per DLH

c) calculate following

	Cell Phones	Tablet PCs
Setup	264960	132480
Production support	132480	132480
Total Cost	397440	264960
Unit	92000	92000
Unit cost	4.32	2.88