Chapter 4, Problem 5E

To determine

Activity Based Costing:

Method of recognizing activities in the organization and allotment of cost of each activity thereto is known as activity based costing.

To compute:Activity rates for given activities related to deluxe model and basic model of the company.

Explanation of Solution

Activity rates shown in below table:

Activity	Budget cost ($)	Deluxe model	Basic model	Total of deluxe and basic	Activity rate ($)
Parts required	625,000	20,000 parts	30,000 parts	50,000 parts	12.5/ part
Batches made	900,000	250 batches	100 batches	350 batches	2571.4/ batch
Purchase orders	105,000	50 order	20 order	70 orders	1500/ order
Invoices	175,000	50invoices	10invoices	60 invoices	2,917/ invoice
Space occupied	300,000	10,000 square foot	7,000 square foot	17000 square foot	17.6/ square feet
Models	75,000	1 model	1 model	2 models	37,500/ model

Table(1)

Hence,an activity rate of each single activity is now ascertained.

Working notes:

Formula to calculate activity rate is,

   $\text{Activity}\text{rate}=\frac{\text{Total}\text{overhead}\text{cost}\text{apportioned to pool}}{\text{Total}\text{estimated}\text{activity}\text{level}}$

Calculation of activity rate for parts required,

   $\begin{array}{c}\text{Activity}\text{rate}=\frac{\$625,000}{50,000\text{ parts}}\\ =\$12.5\end{array}$

Calculation of activity rate for batches made,

   $\begin{array}{c}\text{Activity}\text{rate}=\frac{\$900,000}{350\text{/batch}}\\ =\$2571.4\end{array}$

Calculation of activity rate for purchase orders,

   $\begin{array}{c}\text{Activity}\text{rate}=\frac{\$105,000}{70\text{ orders}}\\ =\$1500\end{array}$

Calculation of activity rate for invoices,

   $\begin{array}{c}\text{Activity}\text{rate}=\frac{\$175,000}{60\text{ invoices}}\\ =\$2,917\end{array}$

Calculation of activity rate for space occupied,

   $\begin{array}{c}\text{Activity}\text{rate}=\frac{\$300,000}{17,000\text{ square feet}}\\ =\$17.6\end{array}$

Calculation of activity rate for models,

   $\begin{array}{c}\text{Activity}\text{rate}=\frac{\$75,000}{2\text{ models}}\\ =\$37,500\end{array}$

Assignment of cost to deluxe model and basic model is shown in below table,

Activity	Deluxe model	Basic model	Cost of deluxe model ($)	Cost of deluxe model ($)
Parts required	20,000 parts	30,000 parts	250,000	375,000
Batches made	250 batches	100 batches	642,850	257,140
Purchase orders	50 order	20 order	75,000	30,000
Invoices	50invoices	10invoices	145,850	29,170
Space occupied	10,000 square foot	7,000 square foot	176,000	123,200
Models	1 model	1 model	37,500	37,500

Table(2)

Hence,cost to each activity related to deluxe model and basic model is now determined.

Working notes:

Formula to calculate overhead cost per unit of each model is,

   $\text{Per}\text{model}\text{cost}=\text{Activity}\text{level}\times \text{Activity}\text{rate}$

Deluxe model

Calculation of overhead cost for parts required,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$20,000\times 12.5\\ =\$250,000\end{array}$

Calculation of overhead cost for batches made,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$250\times 2571.4\\ =\$642,850\end{array}$

Calculation of overhead cost for purchase orders,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$50\times 1500\\ =\$75,000\end{array}$

Calculation of overhead cost for invoices,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$50\times 2917\\ =\$145,850\end{array}$

Calculation of overhead cost for space occupied,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$10,000\times 17.6\\ =\$176,000\end{array}$

Calculation of overhead cost for models,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$37,500\times 1\\ =\$37,500\end{array}$

Basic model

Calculation of overhead cost for parts required,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$30,000\times 12.5\\ =\$375,000\end{array}$

Calculation of overhead cost for batches made,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$100\times 2571.4\\ =\$257,140\end{array}$

Calculation of overhead cost for purchase orders,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$20\times 1500\\ =\$30,000\end{array}$

Calculation of overhead cost for invoices,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$10\times 2917\\ =\$29,170\end{array}$

Calculation of overhead cost for space occupied,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$7,000\times 17.6\\ =\$123,200\end{array}$

Calculation of overhead cost for models,

   $\begin{array}{c}\text{Per}\text{model}\text{cost}=\$37,500\times 1\\ =\$37,500\end{array}$