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4.8 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.

Activity-Based Product Costing Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omego) 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 Production Setup Materials handling Inspection Product engineering Total Activity Cost Pool $259,200 55,000 9,750 60,000 123,200 $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 bose usage quantities and units produced for the three products were determined from corporate records and are as follows: Number of Number of Machine Number of Number of Inspection Engineering Hours Setups Parts Hours 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 3,240 550 325 1,200 440 4,050 2 Total 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 volume

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