Question

Panamint Systems Corporation is estimating activity costs associated with producing disk drives, tapes drives, and wire drives. The indirect labor can be traced to four separate activity pools. The budgeted activity cost and activity base data by product are provided below.

Activity Cost Activity Base
Procurement $370,000 Number of purchase orders
Scheduling 250,000 Number of production orders
Materials handling 500,000 Number of moves
Product development 730,000 Number of engineering changes
Production 1,500,000 Machine hours


Number of Number of Number of Number of Machine Number of
Purchase Orders Production Orders Moves Engineering Changes Hours Units

Disk drives 4,000 300 1,400 10 2,000 2,000
Tape drives 4,000 150 800 10 8,000 4,000
Wire drives 12,000 800 4,000 25 10,000 2,500

35. Determine the activity rate for procurement per purchase order.
a $43.53
b $18.50
c $15.42
d $37.00

36. Determine the activity rate per production order for scheduling.
a $200.00
b $20.00
c $29.41
d $10.42

37. Determine the activity rate for materials handling per move.
a $58.82
b $50.00
c $20.83
d $80.65

38. Determine the activity rate for product development per change.
a $73,000
b $8,588
c $30,417
d $16,222

39. Determine the activity rate for production per machine hour.
a $62.50
b $150.00
c $75.00
d $176.47

40. Determine the activity-based cost for each disk drive unit.
a $92.25
b $130.69
c $394.12
d $279.57

41. Determine the activity-based cost for each wire drive unit.
a $204.13
b $173.51
c $744.06
d $394.12

42. Determine the activity-based cost for each tape drive unit.
a $97.73
b $232.69
c $394.12
d $103.84

Answer 1

Concepts and reason

Cost Hierarchy:

A system that classifies costs into various levels to create activity cost pools is known as Cost hierarchy. A cost hierarchy classifies the costs into four activities. They are:

Unit-Level activity: It is an activity, in which costs are incurred and allocated to every unit of production.

Batch-Level activity: It is an activity, in which costs are incurred and allocated to every batch of units that are produced, irrespective of the number of units produced for a batch.

Product-Level activity: It is an activity, in which costs are incurred and allocated to every product, irrespective of the units or batches produced for a period.

Facility-Level activity: It is an activity, in which costs are incurred on all activities irrespective of the unit, batches, or products produced for a period.

Fundamentals

Procurement cost per purchase order: The cost per procuring an order to purchase some material required for task is said to be the procurement cost per purchase order.

Scheduling cost per production order: The orders must be in such a way that the ordered products must be available by the time it is required for the production. Therefore, the orders must be scheduled in such a way. The cost for scheduling each order is said to be the scheduling cost per production order.

Material handling cost per move: The purchased material will be in the different processes and moved from one process to another which costs some value. The value of cost is called material handling cost per move.

Product development cost per engineering change: The cost for the development of product with the use of engineering is the product development cost per engineering change.

Production cost per machine hour: The production cost with the use of machinery is said to be the product cost per machine hour.

35.

The activity rate for the procurement per purchase order is as shown below:

$\begin{array}{c}\\{\rm{Procurement cost per order = }}\frac{{{\rm{Total procurement cost}}}}{{{\rm{Total Number of purchase orders}}}}\\\\{\rm{ = }}\frac{{\$ 370,000}}{{20,000}}\\\\ = {\rm{ \$ 18}}{\rm{.50}}\\\end{array}$

Working notes:

$\begin{array}{c}\\{\rm{Number of purchase orders = Disk drives + Tape drives + Wire drives}}\\\\{\rm{ = 4,000 + 4,000 + 12,000}}\\\\{\rm{ = 20,000}}\\\end{array}$

36.

The activity rate per production order for scheduling is as shown below:

$\begin{array}{c}\\{\rm{Activity rate for prodution order for scheduling = }}\frac{{{\rm{Total scheduling cost}}}}{{{\rm{Total Number of production orders}}}}\\\\{\rm{ = }}\frac{{\$ 250,000}}{{1,250}}\\\\ = {\rm{ \$ 200}}\\\end{array}$

Working notes:

$\begin{array}{c}\\{\rm{Number of prodution orders = Disk drives + Tape drives + Wire drives}}\\\\{\rm{ = 300 + 150 + 800}}\\\\{\rm{ = 1,250}}\\\end{array}$

37.

The activity rate for materials handling per move as shown below:

$\begin{array}{c}\\{\rm{Activity rate for materials handling per move = }}\frac{{{\rm{Total material handling cost}}}}{{{\rm{Total Number of moves}}}}\\\\{\rm{ = }}\frac{{\$ 500,000}}{{6,200}}\\\\ = {\rm{ \$ 80}}{\rm{.65}}\\\end{array}$

Working notes:

$\begin{array}{c}\\{\rm{Number of moves = Disk drives + Tape drives + Wire drives}}\\\\{\rm{ = 1,400 + 800 + 4,000}}\\\\{\rm{ = 6,200}}\\\end{array}$

38.

The activity rate for product development per change is as shown below:

$\begin{array}{c}\\{\rm{Activity rate for product development per change = }}\frac{{{\rm{Total product development cost}}}}{{{\rm{Total Number of engineering changes}}}}\\\\{\rm{ = }}\frac{{\$ 730,000}}{{45}}\\\\ = {\rm{ \$ 16,222}}\\\end{array}$

Working notes:

$\begin{array}{c}\\{\rm{Number of moves = Disk drives + Tape drives + Wire drives}}\\\\{\rm{ = 10 + 10 + 25}}\\\\{\rm{ = 45}}\\\end{array}$

39.

The activity rate for production per machine hour is as shown below:

$\begin{array}{c}\\{\rm{Activity rate for production per machine hour = }}\frac{{{\rm{Total production cost}}}}{{{\rm{Total Number of machine hours}}}}\\\\{\rm{ = }}\frac{{\$ 1,500,000}}{{20,000}}\\\\ = {\rm{ \$ 75}}\\\end{array}$

Working notes:

$\begin{array}{c}\\{\rm{Number of machine hours = Disk drives + Tape drives + Wire drives}}\\\\{\rm{ = 2,000 + 8,000 + 10,000}}\\\\{\rm{ = 20,000}}\\\end{array}$

40.

The activity based cost for each disk drive unit is as shown below:

$\begin{array}{c}\\{\rm{Total activity based cost for each disk drive unit = }}\frac{{{\rm{Total activity based cost}}}}{{{\rm{Number of units}}}}\\\\ = \frac{{\$ 559,130}}{{2,000}}\\\\ = \$ 279.57\\\end{array}$

Working notes:

$\begin{array}{c}\\\left( {{\rm{Total Activity based cost}}} \right){\rm{ = }}\left( {{\rm{Number of purchase orders}} \times {\rm{Purchase cost per order}}} \right)\\\\ + \left( {{\rm{Number of production orders}} \times {\rm{Production cost per order}}} \right)\\\\ + \left( {{\rm{Number of moves}} \times {\rm{Material handling cost per move}}} \right)\\\\ + \left( \begin{array}{l}\\{\rm{Number of engineering changes}}\\\\ \times {\rm{Product development per change}}\\\end{array} \right)\\\\ + \left( \begin{array}{l}\\{\rm{Number of machine hours}}\\\\ \times {\rm{Activity product rate per machine hour}}\\\end{array} \right)\\\\{\rm{ = }}\left( {4,000 \times \$ 18.50} \right) + \left( {300 \times \$ 200} \right) + \left( {1,400 \times \$ 80.65} \right)\\\\ + \left( {10 \times \$ 16,222} \right) + \left( {2,000 \times \$ 75} \right)\\\\ = {\rm{\$ 559,130}}\\\end{array}$

41.

The activity based cost for each wire drive unit is as shown below:

$\begin{array}{c}\\{\rm{Total activity based cost for each wire drive unit = }}\frac{{{\rm{Total activity based cost}}}}{{{\rm{Number of units}}}}\\\\ = \frac{{\$ 1,860,150}}{{2,500}}\\\\ = \$ 744.06\\\end{array}$

Working notes:

$\begin{array}{c}\\\left( {{\rm{Total Activity based cost}}} \right){\rm{ = }}\left( {{\rm{Number of purchase orders}} \times {\rm{Purchase cost per order}}} \right)\\\\ + \left( {{\rm{Number of production orders}} \times {\rm{Production cost per order}}} \right)\\\\ + \left( {{\rm{Number of moves}} \times {\rm{Material handling cost per move}}} \right)\\\\ + \left( \begin{array}{l}\\{\rm{Number of engineering changes}}\\\\ \times {\rm{Product development per change}}\\\end{array} \right)\\\\ + \left( \begin{array}{l}\\{\rm{Number of machine hours}}\\\\ \times {\rm{Activity product rate per machine hour}}\\\end{array} \right)\\\\{\rm{ = }}\left( {12,000 \times \$ 18.50} \right) + \left( {800 \times \$ 200} \right) + \left( {4,000 \times \$ 80.65} \right)\\\\ + \left( {25 \times \$ 16,222} \right) + \left( {10,000 \times \$ 75} \right)\\\\ = {\rm{\$ 1,860,150}}\\\end{array}$

42.

The activity based cost for each tape drive unit is as shown below:

$\begin{array}{c}\\{\rm{Total activity based cost for each tape drive unit = }}\frac{{{\rm{Total activity based cost}}}}{{{\rm{Number of units}}}}\\\\ = \frac{{\$ 930,740}}{{4,000}}\\\\ = \$ 232.69\\\end{array}$

Working notes:

$\begin{array}{c}\\\left( {{\rm{Total Activity based cost}}} \right){\rm{ = }}\left( {{\rm{Number of purchase orders}} \times {\rm{Purchase cost per order}}} \right)\\\\ + \left( {{\rm{Number of production orders}} \times {\rm{Production cost per order}}} \right)\\\\ + \left( {{\rm{Number of moves}} \times {\rm{Material handling cost per move}}} \right)\\\\ + \left( \begin{array}{l}\\{\rm{Number of engineering changes}}\\\\ \times {\rm{Product development per change}}\\\end{array} \right)\\\\ + \left( \begin{array}{l}\\{\rm{Number of machine hours}}\\\\ \times {\rm{Activity product rate per machine hour}}\\\end{array} \right)\\\\{\rm{ = }}\left( {4,000 \times \$ 18.50} \right) + \left( {150 \times \$ 200} \right) + \left( {800 \times \$ 80.65} \right)\\\\ + \left( {10 \times \$ 16,222} \right) + \left( {8,000 \times \$ 75} \right)\\\\ = {\rm{\$ 930,740}}\\\end{array}$

Ans: Part 35

The activity rate for procurement per purchase order is $18.50.

Part 36

The activity rate per production order for scheduling is $200.

Part 37

The activity rate for materials handling per move is $80.65.

Part 38

The activity rate for product development per change is $16,222.

Part 39

The activity rate for production per machine hour is $75.

Part 40

The activity based cost for each disk drive unit is $279.57.

Part 41

The activity based cost for each wire drive unit is $744.06.

Part 42

The activity based cost for each tape drive unit is $232.69.