Question

Activity-Based 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
Setup			55,000
Materials handling			9,750
Inspection			60,000
Product engineering			123,200
	Total		$507,150

The 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 activity rate for each activity.

Production	$ per machine hour
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  .

Answer 1

1
Activity	Activity Cost Pool	Cost Driver	Total units of cost driver	Cost per activity
Production	2,59,200	Machine hours	3,240	80
Setup	55,000	Number of setups	550	100
Materials handling	9,750	Number of parts	325	30
Inspection	60,000	Number of inspection hours	1,200	50
Product engineering	1,23,200	Number of engineering hours	440	280
	5,07,150
2
Alpha
Cost Driver	Total units of cost driver	Cost per activity	Total activity cost
Machine hours	1,440	80	115200
Number of setups	75	100	7500
Number of parts	65	30	1950
Number of inspection hours	400	50	20000
Number of engineering hours	125	280	35000
			179650
Total units			1800
Cost per unit			99.80555556
			99.81	Round
Cost Driver	Total units of cost driver	Cost per activity	Total activity cost
Machine hours	1,080	80	86400
Number of setups	165	100	16500
Number of parts	80	30	2400
Number of inspection hours	300	50	15000
Number of engineering hours	175	280	49000
			169300
Total units			1350
			125.4074074
Cost per unit			125.41	Round
Cost Driver	Total units of cost driver	Cost per activity	Total activity cost
Machine hours	720	80	57600
Number of setups	310	100	31000
Number of parts	180	30	5400
Number of inspection hours	500	50	25000
Number of engineering hours	140	280	39200
			158200
Total units			900
Cost per unit			175.7777778
			175.78	Round
3
Because we have used ABC and it considers all activities besides machine hours on the number of activities used by each product.

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