Chapter 5, Problem 5ESA

a

To determine

Allocate the cost of inspection among the products by assuming that it is driven unit-level activities.

Explanation of Solution

Unit level cost:

The performance is based on every single unit of products or services. Examples are indirect labor, production supplies, and inspection costs.

The calculation of the allocation rate is as follows:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Cost to be allocated (Inspection cost)}}{\text{Cost driver (Direct labor hours) }}\\ =\frac{\$540,000}{27,000\text{ hours}}\\ =\$20\text{ per direct labor hour}\end{array}$

Hence, the allocation rate per direct labor hour is $20.

The calculation of the total cost allocated for high-caliber boards is as follows:

$\begin{array}{c}\text{Allocated cost (high-caliber)}=\text{Labor hours}\times \text{Per direct labor hour}\\ =6,000\text{ hours}\times \$20\\ =\$120,000\end{array}$

Hence, the allocated cost for high-caliber boards is $120,000.

The calculation of the total cost allocated for low-caliber boards is as follows:

$\begin{array}{c}\text{Allocated cost (low-caliber)}=\text{Labor hours}\times \text{Per direct labor hour}\\ =21,000\text{ hours}\times \$20\\ =\$420,000\end{array}$

Hence, the allocated cost for low-caliber boards is $420,000.

b

To determine

Allocate the cost of inspection among the products by assuming that it is driven batch-level activities.

Explanation of Solution

Batch level cost:

Batch level is performed based on each group or batch. Examples are setup cost, quality control cost, and material handling cost.

The calculation of allocation rate is as follows:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Cost to be allocated (Inspection cost)}}{\text{Cost driver (Number of batches) }}\\ =\frac{\$540,000}{\text{40 batches}}\\ =\$13,500\text{ per batch}\end{array}$

Hence, the allocation rate per batch is $13,500.

The calculation of the total cost allocated for high-caliber boards is as follows:

$\begin{array}{c}\text{Allocated cost (high-caliber)}=\text{Number of batches}\times \text{Per batch}\\ =20\text{ batches}\times \$13,500\\ =\$270,000\end{array}$

Hence, the allocated cost for high-caliber boards is $270,000.

The calculation of the total cost allocated for low-caliber boards is as follows:

$\begin{array}{c}\text{Allocated cost (low-caliber)}=\text{Number of batches}\times \text{Per batch}\\ =20\text{ batches}\times \$13,500\\ =\$270,000\end{array}$

Hence, the allocated cost for low-caliber boards is $270,000.

c

To determine

Allocate the cost of inspection among the products by assuming it is driven product-level activities.

Explanation of Solution

Product level cost:

Product level supports the products of particular services or products. Examples are specific to product advertising cost and engineering and design cost.

The calculation of the allocation rate is as follows:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Cost to be allocated (Inspection cost)}}{\text{Cost driver (Number of inspectors) }}\\ =\frac{\$540,000}{\text{5 inspectors}}\\ =\$108,000\text{ per inspector}\end{array}$

Hence, the allocation rate per inspector is $108,000.

The calculation of the total cost allocated for high-caliber boards is as follows:

$\begin{array}{c}\text{Allocated cost (high-caliber)}=\text{Number of inspectors}\times \text{Per inspector}\\ =3\text{ inspectors}\times \$108,000\\ =\$324,000\end{array}$

Hence, the allocated cost for high-caliber boards is $324,000.

The calculation of the total cost allocated for low-caliber boards is as follows:

$\begin{array}{c}\text{Allocated cost (low-caliber)}=\text{Number of inspectors}\times \text{Per inspector}\\ =2\text{ inspectors}\times \$108,000\\ =\$216,000\end{array}$

Hence, the allocated cost for low-caliber boards is $216,000.

d

To determine

Allocate the cost of inspection among the products by assuming that it is driven facility-level activities.

Explanation of Solution

Facility level cost:

Facility level supports all the operations that are carried out in the company. Examples are landscaping cost and depreciation on manufacturing facility.

The calculation of the allocation rate is as follows:

$\begin{array}{c}\text{Allocation rate}=\frac{\text{Cost to be allocated (Inspection cost)}}{\text{Cost driver (Number of square feet) }}\\ =\frac{\$540,000}{100,000\text{ square feet}}\\ =\$5.40\text{ per square feet}\end{array}$

Hence, the allocation rate per square feet is $5.40.

The calculation of the total cost allocated for high-caliber boards is as follows:

$\begin{array}{c}\text{Allocated cost (high-caliber)}=\text{Number of square feets}\times \text{Per square feet}\\ =30,000\text{ square feet}\times \$5.40\\ =\$162,000\end{array}$

Hence, the allocated cost for high-caliber boards is $162,000.

The calculation of the total cost allocated for low-caliber boards is as follows:

$\begin{array}{c}\text{Allocated cost (low-caliber)}=\text{Number of square feets}\times \text{Per square feet}\\ =70,000\text{ square feet}\times \$5.40\\ =\$378,000\end{array}$

Hence, the allocated cost for low-caliber boards is $378,000.