Question

Activity-Based Determining the cost of a product, which consist of direct materials, direct labor, and factory overhead.Product Costing

Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:

Activity		Activity Cost Pool
Production			$259,200
Changing the characteristics of a machine to produce a different product.Setup			55,000
Materials handling			9,750
Inspection			60,000
Product engineering			123,200
	Total		$507,150

The A measure of activity that is related to changes in cost. Used in analyzing and classifying cost behavior.activity bases identified for each activity are as follows:

Activity	Activity Base
Production	Machine hours
Setup	Number of setups
Materials handling	Number of parts
Inspection	Number of inspection hours
Product engineering	Number of engineering hours

The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:

		Machine Hours			Number of Setups			Number of Parts			Number of Inspection Hours			Number of Engineering Hours			Units
Alpha		1,440			75			65			400			125			1,800
Beta		1,080			165			80			300			175			1,350
Omega		720			310			180			500			140			900
	Total	3,240			550			325			1,200			440			4,050

Each product requires 48 minutes per unit of machine time.

Required:

If required, round all per unit amounts to the nearest cent.

1. Determine the The cost of an activity per unit of activity base.activity rate for each activity.

Production	$ per machine hour
Changing the characteristics of a machine to produce a different product.Setup	$ per setup
Materials handling	$ per part
Inspection	$ per inspection hour
Product engineering	$ per engineering hour

2. Determine the total and per-unit activity cost for all three products.

	Total Activity Cost	Activity Cost Per Unit
Alpha	$	$
Beta
Omega

3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?

The unit costs are different because the products consume many activities in ratios different from the

• volume
• sales mix

.

Answer 1

Activity cost per unit = Overhead cost/Total Activity
Production	$80.00
Changing the characteristics of a machine to produce a different product.Setup	100
Materials handling	30
Inspection	50
Product engineering	280

Cost assigned = activity rate*Activity consumed

	Total Activity Cost	Activity Cost Per Unit
Alpha	$179,650.00	$99.81
Beta	$169,300.00	$125.41
Omega	$158,200.00	$175.78

The unit costs are different because the products consume many activities in ratios different from the

volume