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.