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 Direct labor hours 600,000 70,000 300,000 30,000 50,000 Machine hours 100,000 350,000 Number of setups 40 80 120 Testing hours Number of purchase orders 1,000 9,000 3,500 500 10,000 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 Check My Work 0 | 99.

Answer 1

REQ.1

Overhead Activity	Part X12	Part YK7	Activity Driver
Machining	(50,000/350,000) 0.14	(300,000/350,000) 0.86	Machine Hour
Setups	(40/120) 0.33	( 80/120) 0.66	Number of setups
Inspecting products	(1000/10,000) 0.1	( 9000/10,000) 0.9	Testing Hours
Purachasing	(500/4000) 0.13	(3500/4000) 0.86	Number of purchase order

Req. 2 Plantwide Rate:( Direct Labor Hours)

Overhead Activity	Part X12	Part YK7
Plantwide:
Manufacturing	(30,000/100,000) 0.30	(70,000/100,000) 0.70

Which product is undercosted?

YK7

( When compared with the consumption ratios, it appears that the plantwide rate is undercosting Part YK7 and overcosting Part X12.)

Would this remove cost distortation?

Yes

( The plantwide rate using machine hours may make the assignments better—all but one of Part X12’s activities has a consumption ratio close to 0.14. If the activity costs were about equal, then we could say that the cost assignment with machine hours would definitely be more accurate. )