Activity-based and department rate product costing and product cost distortions
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Activity-based and department rate product costing and product cost distortions
Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows:
The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:
The activity-base usage quantities and units produced for the two products follow:
Number of Number of Direct Labor Hours— Direct Labor Hours— Units
Production Runs Moves Cutting Finishing Produced
Snowboards 430 5,000 4,000 2,000 6,000
Skis 70 2,500 2,000 4,000 6,000
Total 500 7,500 6,000 6,000 12,000
Required:
1. Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the
production departments, so that the total factory overhead is $315,000 and $540,000 for the Cutting and Finishing departments, respectively.*
2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in
(1).*
Complete the Activity Tables for snowboards and skis.
3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments.**
4. Determine the total and per-unit cost assigned to each product under activity-based costing.**
5. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and
activity-based costing methods.
*If required, round your answers to two decimal places. Refer to the Amount Descriptions list provided for the exact wording of the answer
choices for text entries.
** If required, round your cost per-unit answer to two decimal places.
Instructions
1 Indirect labor $507,000.00
2 Cutting Department 156,000.00
3 Finishing Department 192,000.00
4 Total $855,000.00
1 Activity Budgeted Activity
Cost Activity Base
2 Production control $237,000.00 Number of production runs
3 Materials handling 270,000.00 Number of moves
4 Total $507,000.00
Amount Descriptions
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Amount Descriptions
Cutting Department
Finishing Department
Production Control
Materials Handling
Setups
Skis
Snowboards
1. Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so
that the total factory overhead is $315,000 and $540,000 for the Cutting and Finishing departments, respectively. If required, round your answers to two decimal places.
Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.
2. Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1). If required, round your
answers to two decimal places. Refer to the Amount Descriptions list provided for the exact wording of the answer choices for text entries.
Complete the Activity Tables for snowboards and skis.
3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. Enter
these rates in the Activity Rate columns.
4. Determine the total and per-unit cost assigned to each product under activity-based costing. If required, round your cost per-unit answer to
two decimal places.
Snowboards
Activity Activity- Activity Activity
Usage X Rate = Cost
Production control
Materials handling
Factory Overhead Rates
1 Department Production
Department Rate
2 Cutting Department $2.00 per direct labor hour
3 Finishing Department $3.00 per direct labor hour
Factory Overhead Costs
1 Product Total Factory
Overhead
Factory Overhead
Per Unit
2 Snowboards $390,000.00 $65.00
3 Skis
Activity Table - Snowboards
$ $
$
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Cutting Department
Finishing
Department
Total
Number of units
Activity cost per unit
Complete the Activity Table for skis.
3. Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. Enter
these rates in the Activity Rate columns.
4. Determine the total and per-unit cost assigned to each product under activity-based costing. If required, round your cost per-unit answer to
two decimal places.
Skis
Activity Activity- Activity Activity
Usage X Rate = Cost
Production control
Materials handling
Cutting Department
Finishing
Department
Total
Number of units
Activity cost per unit
5. Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing
methods. Check all that apply.
$
$
$
$
Activity Table - Skis
$ $
$
$
$
$
$
Final Question
The multiple production department factory overhead rate method distorts the unit costs.
The activity-based method separately accounts for the production control and materials handling activity costs, decreasing cost distortion.
The activity-based overhead allocation reveals that snowboards are more costly on a per-unit basis than are the skis.
Snowboards have fewer production control and number of moves than do skis, so skis have higher activity costs per unit.