Drivers Scented cards Regular cards

Inspection hour 180 120

Setup hour 70 30
Machine hour 160 480
Number of moves 480 120
The following activity data have been collected:

Inspecting products $7,500

Setting up equipment 4,750

Machining 5,120

Moving materials 2,700

Required:

1. Calculate the consumption ratios for the four drivers (round to two decimal

places).

2. CONCEPTUAL CONNECTION Is there evidence of product diversity?

Explain the significance of product diversity for decision making if the company

chooses to use machine hours to assign all overhead.

3. Calculate the activity rates that would be used to assign costs to each product

(round to two decimal places).

4. Suppose that the activity rate for inspecting products is $20 per inspection hour.

How many hours of inspection are expected for the coming year?

Solution:

Calculate consumption ratio for the four drivers:

 Drivers Scented Regular Total

cards cards

Inspection 180 120 300

hour
Setup hour 70 30 100
Machine 160 480 640

hour
Number of 480 120 600

moves
Consumption ratio for drives:

Inspection hour .06 0.4

Setup hour 0.7 0.3
Machine hour 0.25 0.75
Number of 0.8 0.2

moves

Significance of product diversity for making decision:

It is observed that the accuracy problems will occur if the machine hours are not

assigned properly to the overhead. The numbers of moves and the setup hours

have markedly varying consumption ratios. Thus. it can be concluded that the

consumption ratios vary significantly from driver to driver.

Calculate the activity rates:

The formula for calculating activity rates is as follows:

Activity rates = Cost / Sum of demand of products

 drivers cost total Activity rates

Inspection $7,500 300 25 per

hour inspection

hour
Setup hour $4,750 100 47.5 per

setup hour
Machine hour $5,120 640 8 per

machine hour
Number of $2,700 600 4.5 per move

moves
Expected inspection hours in next year:

Expected inspection hours = Cost / Rate

Substitute:

Where,

The rate is given as $20

The cost is given as $7,500

Expected inspection hours = $7,500 / $20

= 375

Thus, the expected number of inspection hours is 375.