Activities Cost Drivers Allocation Rate

Material handling Number of parts $ 8 per part

Assembly Labour hours 80 per hour

Time spent by item at

Inspection 12 per minute
inspection station

The previous plant-wide allocation rate method was based on direct manufacturing labour hours, and if that method is used, t
Instructions:
1a.     Assume that a batch of 1,000 pairs of shoes requires 4,000 parts, 50 direct manufacturing lab
time. What are the indirect manufacturing costs per pair of shoes to produce a batch of 1,000 pairs
plant-wide allocation rate method is used?

assumption : direct manufacturing hours are used to calculate the overhead cost when using plant-wide allocation r

Overhead allocation cost for 1 hr $80

Manufacturing labour hours 50
pairs of shoes 1000
# of parts 4000

Total Overhead cost for 1000 pairs $4,000

Total overhead cost for 1 pair $4.00

Note: Indirect manufacturing cost is the same as overhead cost

1b.     What are the indirect manufacturing costs per pair of shoes to produce a batch of 1,000 pair
activity-based method of allocation was used?

Activities Cost Drivers Allocation Rate

Material handling Number of parts $ 8 per part
Assembly Labour hours 80 per hour
Time spent by item at
Inspection inspection station 12 per minute

TOTAL

Total overhead for 1 pair $36.72

rs, and if that method is used, the allocation rate is $80 per labour hour.

direct manufacturing labor hours, and 60 minutes of inspection

ce a batch of 1,000 pairs of shoes, assuming the previous

using plant-wide allocation rate method

uce a batch of 1,000 pairs of shoes, assuming the

Total Allocation Formula

$32,000 $8 x4000
$4,000 $80x50

60X12
$720
$36,720
The Silvernagel Company is attempting to institute an activity-based accounting system to cost products. The Purcha
473,500 per year and has five people working in it

Activity Allocation of Measure # of People

Finding best suppliers # of telephone calls 3
Issuing purchase order # of purchase orders 1
Reviewing receiving reports # of receiving reports 1

Activity Activity During the year Unit of measure

Finding best suppliers 150,000 telephone calls
Issuing purchase order 10,000 purchase orders
Reviewing receiving reports 7,000 reports filed

Complex product reguirements

Activity requirement Unit of measure
Finding best suppliers 115 telephone calls
Issuing purchase order 36 purchase orders
Reviewing receiving reports 29 reports filed

Solution

2A. What amount of Purchasing Department cost should be assigned to the manufacturing of this product?

a) Finding the activity rates

Activity Total Cost ($) Activity During the year

Finding best suppliers 300,000 150,000
Issuing purchase order 100,000 10,000
Reviewing receiving reports 73,500 7,000

b) allocate cost to the complex product

Activity Allocation Rate ($) Product requirement

Finding best suppliers 2.00 115

Issuing purchase order 10.00 36
Reviewing receiving reports 10.50 29
Total:

2B. If 200 units of product are manufactured during the year, what is the Purchasing Department
cost per unit?

Total product cost Units produced

894.5 / 200
unting system to cost products. The Purchasing Department incurs costs of
Because finding the best supplier takes the majority of the effort in the department, most of the costs are allocated

Total Cost ($)

300,000
100,000
73,500

e manufacturing of this product?

Allocation Rate ($)

2.0
10.0
10.5

Allocated cost to the

product
$230.00
$360.00
 $304.50
$894.50

s the Purchasing Department

Cost per Unit

$4.47
ost of the costs are allocated to this area.
Question 3:
Drextel Chemical Company has identified activity centers to which overhead costs are
assigned. The cost pools and cost drivers for these centers are as follows:

Additional Data: One direct labour hour costs $10, and the 200,000 lbs. of material were
purchased for $360,000.
Required: Determine the unit cost for each product.

Activity Center Cost Pool ($)

Utilities 300,000
Setup 100,000

Materials handling 800,000

The company’s products and related statistics follow:

Product A
Machine hours 35,000
Direct Material 75,000 lbs.
Direct labor hours 20,000
Number of setups 200
Number of units 10,000
produced

Activity Center Cost Pool ($)

Utilities 300,000

Setup 100,000
Materials handling 800,000

Product A

Direct Material 75,000 lbs.

Direct labour hours 20,000

Utilities (Overhead) 35,000
Setup (Overhead) 200
Material Handling
75,000
(Overhead)
Total
Unit Cost

Product B
Direct Material 125,000 lbs.
Direct labour hours 25,000
Utilities (Overhead) 15,000
Setup (Overhead) 500
Material Handling
125,000
(Overhead)
Total
Unit Cost
activity centers to which overhead costs are
or these centers are as follows:

osts $10, and the 200,000 lbs. of material were

h product.

Cost Driver
50,000 machine hours
700 setups

200,000 lbs. of material

Product B
15,000
125,000 lbs.
25,000
500

5,000

Cost Driver Unit Cost

$6 / machine
50,000 machine hours
hour

700 setups $143 / setup

200,000 lbs. of material $4 / pound

Product A Cost ($)

75,000 x (360K / 200K) = $135,000

20,000 x 10 = $200,000
35,000 x 6 = $210,000
200 x 143 = $28,600
75,000 x $4 = $300,000

$873,600
$873,600 / 10,000 = $87.36

Product B Cost ($)

125,000 x (360K / 200K) = $225,000
25,000 x 10 = $250,000
15,000 x 6 = $90,000
500 x 143 = $71,500

125,000 x $4 = $500,000

$1,136,500
$1,136,500 / 5,000 = $227.30