Chapter 4, Problem 15E

Activity-based costing and product cost distortion

The management of Four Finger Appliance Company in Exercise 14 has asked you to use activity-based costing instead of direct labor hours to allocate factory overhead costs to the two products. You have determined that $81,000 of factory overhead from each of the production departments can be associated with setup activity ($162,000 in total). Company records indicate that blenders required 135 setups, while the toaster ovens required only 45 setups. Each product has a production volume of 7,500 units.

Determine the three activity rates (assembly, test and pack, and setup).

Determine the total factory overhead and factory overhead per unit allocated to each product using the activity rates in (A).