Question

Paragraph Styles Performance Products Corporation makes two products, Titanium Rims and Posts. Data regarding the two products is provided in the following table: Direct Labor Hours per Unit Annual Production Rims 0.40 20,000 units Posts 0.20 80,000 units Additional information about the company follows: a. Rims require $17.00 in direct materials per unit, and Posts require $10.00. b. The direct labor wage rate is $16.00 per hour. C. Rims are more complex to manufacture than Posts, and they require special equipment. d. The Activity Based Costing (ABC) System has the following activity cost pools: Activity Cost Pool Activity Measure Rims Posts Estimated Overhead Cost Total Activity for Rims and Posts Machine Setups $21,600 10080 180 Number of Machine Setups Special Processing Machine Hours $180,000 4,000 4,000 General Factory Direct Labor Hours $288,000 8.000 16,000 24,000 Required. Use the tables on the following page to determine the following required components: In order to receive full credit please show all work!! 1. Compute the activity rate for each activity pool. 2. Determine the amount of manufacturing overhead assigned to each product (Rims and Posts) for each activity cost pool. 3. Determine the unit product cost of each product (Rinhs and Posts) according to the ABC system.

Answer 1

In this question 2 parts are already calculated, which are absolutely correct. Now, we have to proceed with the Part 3,

Requirement 3 :- Determine the unit product cost of each product (Rims and Posts) according to ABC system.

	Rims	Posts
Direct Materials (Working Note)	$ 340,000	$ 800,000
Direct Labor (Working Note)	$ 128,000	$ 256,000
Manufacturing Overhead (Calculated above in Part 2)	$ 288,000	$ 201,600
Total Costs	$ 756,000	$1,257,600
Unit Cost (Working Note)	$ 37.80	$ 15.72

Working Note:

• Calculation of Direct Material for Rims:-

Direct materials per unit * Annual production

= $17 * 20,000 units = $340,000

• Calculation of Direct Material for Posts:-

Direct materials per unit * Annual production

= $10 * 80,000 units = $800,000

• Calculation of Direct Labor for Rims:-

Direct Labor hour per unit * Annual production * Wage rate

= 0.40 * 20,000 units * $16 = $128,000

• Calculation of Direct Labor for Posts:-

Direct Labor hour per unit * Annual production * Wage rate

= 0.20 * 80,000 units * $16 = $256,000

• Calculation of Unit Cost for Rims:-

Total Costs / Annual Production

= $756,000 / 20,000 = $ 37.80

• Calculation of Unit Cost for Posts:-

Total Costs / Annual Production

= $ 1,257,600 / 80,000 = $ 15.72

Part II

List and describe the steps (in order) for Implementing Activity Based Costing.

Activity Based Costing have four Steps:-

1. Identify the activities such as Machine setups, processing, General factory which consume resources and assign cost to them.

2. Identify the cost drivers such as Machine hours used, Labor hours used, Machine set ups etc.

3. Compute the overhead rate for each of cost driver.

4. Manufacturing Overhead Costs = Overhead rates * Cost driver rate / Volume of Cost driver units consumed by the product.

Limitations of Activity Based costing:

1. Activity Based Costing is very costly to maintain.

2. Cost more to accumulate and analyze information.

If you have any doubt, please feel free to ask me.

Thank you..

Have a Nice day ahead.