Question

Larsen, Inc., produces two types of electronic parts and has provided the following data:

		Part X12		Part YK7		Total
Units produced		100,000		600,000		—
Direct labor hours		30,000		70,000		100,000
Machine hours		50,000		300,000		350,000
Number of setups		40		80		120
Testing hours		1,000		9,000		10,000
Number of purchase orders		500		3,500		4,000

There are four activities: machining, setting up, testing, and purchasing.

Required:

1. Calculate the activity consumption ratios for each product. Round your answers to two decimal places.

	Consumption Ratios
Overhead Activity	Part X12	Part YK7	Activity Driver
Machining			Machine hours
Setups			Number of setups
Inspecting products			Testing hours
Purchasing			Purchase orders

2. Calculate the consumption ratios for the plantwide rate (direct labor hours). Round your answers to two decimal places.

	Consumption Ratios
Overhead Activity	Part X12	Part YK7
Plantwide:
Manufacturing

Which product is undercosted?
Part YK7

3. Would this remove the cost distortion of a plantwide rate?
Yes

Answer 1

SOLUTION

(1)

Overhead activity	Part X12	Part YK7	Activity Driver
Machining	50,000/350,000= 14.29%	300,000/350,000= 85.71%	Machine Hours
Setups	40/120 = 33.33%	80/120= 66.67%	Number of setups
Inspecting products	1,000 / 10,000 = 10%	9,000/10,000 = 90%	Testing hours
Purchasing	500 / 4,000 = 12.5%	3,500 / 4,000 = 87.5%	Purchase orders

(2)

Overhead activity	Part X12	Part YK7
Plantwide:
Manufacturing	30,000/100,000 = 30%	70,000/100,000 = 70%

The plantwide rate is undercosting YK7 and overcosting X12. This is evident because the 0.3 consumption ratio is higher than all but the setup consumption ratio for X12.

(3) Yes, this would remove the cost distortion of a plantwide rate