Activity-Based Costing and Product Cost Distortion Handbrain Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 2,000 direct labor hours. The total indirect labor is budgeted to be $200,000. Time records from indirect labor employees revealed that they spent 30% of their time setting up production runs and 70% of their time supporting actual production. The following information about cell phones and tablet PCs was determined from the corporate records: Number of Setups Direct Labor Hours Units Cell phones 1,200 1,000 80,000 Tablet PCs 2,800 1,000 80,000 Total 4,000 2,000 160,000 If required, round all per unit answers to the nearest cent. a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base. Cell phones $fill in the blank 1 per unit Tablet PCs $fill in the blank 2 per unit b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support. Budgeted Activity Cost Activity Rate Setup $fill in the blank 3 $fill in the blank 4 per setup Production support $fill in the blank 5 $fill in the blank 6 per direct labor hour c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing. Cell phones $fill in the blank 7 per unit Tablet PCs $fill in the blank 8 per unit
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Activity-Based Costing and Product Cost Distortion
Handbrain Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 2,000 direct labor hours. The total indirect labor is budgeted to be $200,000.
Time records from indirect labor employees revealed that they spent 30% of their time setting up production runs and 70% of their time supporting actual production.
The following information about cell phones and tablet PCs was determined from the corporate records:
Number of
SetupsDirect Labor
HoursUnits Cell phones 1,200 1,000 80,000 Tablet PCs 2,800 1,000 80,000 Total 4,000 2,000 160,000 If required, round all per unit answers to the nearest cent.
a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs under a single plantwide factory
overhead rate system using the direct labor hours as the allocation base.Cell phones $fill in the blank 1 per unit Tablet PCs $fill in the blank 2 per unit b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities—one for setup and the other for production support.
Budgeted Activity Cost Activity Rate Setup $fill in the blank 3 $fill in the blank 4 per setup Production support $fill in the blank 5 $fill in the blank 6 per direct labor hour c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.
Cell phones $fill in the blank 7 per unit Tablet PCs $fill in the blank 8 per unit d. Why are the per-unit allocated costs in (a) different from the per-unit activity cost assigned to the products in (c)?
The per-unit indirect labor costs in (a) are distorted because
is consumed by the products in a different ratio from the direct labor. Thecosting method properly allocates the setup-related activity so that thereceive a larger portion of the setup activity cost. Theallocates overhead only on the basis of direct labor hours. Since the direct labor hoursequal for each product, the allocated indirect labor will alsoequal.
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