Question

Consumption Ratios 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 40,000 60,000 100,000 Machine hours 49,000 301,000 350,000 Number of setups 36 84 120 Testing hours 1,200 8,800 10,000 Number of purchase orders 600 3,400 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 Setups Inspecting products Purchasing 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? 3. If the machine hours were used for the plantwide rate, would this remove the cost distortion of a plantwide rate?

Answer 1

Based on detail following is provided to us which is tabulated as under :

Particulars	X12	YK17	Total (Plant Wide)
Unit produced	100,000	600,000	700,000
Direct labor hours	40,000	60,000	100,000
Machine Hours	49,000	301,000	350,000
Setups	36	84	120
Testing Hours	1,200	8,800	10,000
Purchase order	600	3,400	4,000

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

Activity Consumption Ratio per Unit produced	X12	YK17
Machine hour Activity Ratio	0.49	0.50
Setup Activity Ratio	0.00	0.00
Testing Hour Activity Ratio	0.02	0.03
Purchase order Activity Ratio	16.67	40.48

Q. 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?

Activity Consumption Ratio per Unit produced	X12	YK17	Total (Plant Wide)
Direct Labor consumption ratio	0.40	0.10	0.14

The YK17 product will be undercosted if direct labour activity overhead rate is used for allocation since there is wide difference per unit activity in both product and it is difficult to assume that all other activity will also have similar proportion.

Q.3 If the machine hours were used for the plantwide rate, would this remove the cost distortion of a plantwide rate?

The per unit activity rate for both product X12 & YK17 is similar hence use of machine hour plant wide rate will remove cost distortion

Activity Consumption Ratio per Unit produced	X12	YK17	Total (Plant Wide)
Machine hour Activity Ratio	0.49	0.50	0.50