Reference no: EM132690699
Problem - Activity-based and department rate product costing and product cost distortions
White Mountain Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows:
Indirect labor $200,000
Cutting Department 85,000
Finishing Department 95,000
Total $380,000
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:
|
Activity
|
Budgeted Activity Cost
|
Activity Base
|
|
Production control
|
$ 80,000
|
Number of production runs
|
|
Materials handling
|
120,000
|
Number of moves
|
|
Total
|
$200,000
|
|
The activity-base usage quantities and units produced for the two products are shown below.
|
Number of Production Runs
|
Number of Moves
|
Direct Labor Hours-Cutting
|
Direct Labor Hours-Finishing
|
Units Produced
|
|
Snowboards
|
340
|
4,000
|
3,500
|
1,500
|
4,000
|
|
Skis
|
60
|
2,000
|
1,500
|
3,500
|
4,000
|
|
Total
|
400
|
6,000
|
5,000
|
5,000
|
8,000
|
Instructions -
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 $175,000 and $205,000 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).
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.