Larsen, Inc., produces two types of electronic parts and has provided the following data:     PartX12 PartYK7 Total Units produced 100,000 600,000 - Direct labour hours 30,000 70,000 100,000 Machine hours 50,000 300,000 350,000 Number of setups 40 80 120 Testing hours 1,000 9,000 10,000 Number of purchase orders 500 3,500 4,000   There are four activities: machining, setting up, testing, and purchasing. Required: Calculate the activity consumption ratios for each product. Calculate the consumption ratios for the plantwide rate (direct labour hours). When comparedwith the activity ratios, what can you say about the relative accuracy of a plantwiderate? Which product is undercosted? What if the machine hours were used for the plantwide rate? Would this remove the cost distortionof a plantwide rate?

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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Larsen, Inc., produces two types of electronic parts and has provided the following data:

 

 

PartX12

PartYK7

Total

Units produced

100,000

600,000

-

Direct labour hours

30,000

70,000

100,000

Machine hours

50,000

300,000

350,000

Number of setups

40

80

120

Testing hours

1,000

9,000

10,000

Number of purchase orders

500

3,500

4,000

 

There are four activities: machining, setting up, testing, and purchasing.

Required:

  1. Calculate the activity consumption ratios for each product.
  2. Calculate the consumption ratios for the plantwide rate (direct labour hours). When comparedwith the activity ratios, what can you say about the relative accuracy of a plantwiderate? Which product is undercosted?
  3. What if the machine hours were used for the plantwide rate? Would this remove the cost distortionof a plantwide rate?
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