Question

which of the following is the correct formula to compute an activity rate? multiple choice divide the total activity cost by the total cost driver divide the total cost driver by the total activity cost multiply the total activity cost by the total cost driver add the total cost driver to the total activity cost

Answer 1

The correct formula to compute an activity rate is to divide the total activity cost by the total cost driver, which is used in activity-based costing.

Step-by-step explanation:

To compute an activity rate, the correct formula is to divide the total activity cost by the total cost driver. This calculation helps in determining the cost per unit of the cost driver which is used in activity-based costing. For example, if a company wants to find out the rate for machine operation costs, they would divide the total cost of operating the machinery by the number of hours the machines were operated (the cost driver).

Answer 2

option a is the correct method for computing an activity rate. It allows businesses to accurately allocate costs based on the actual consumption of resources by different products or services, leading to more precise product costing and profitability analysis.

In Activity-Based Costing (ABC), an activity rate is used to allocate costs to products or services based on the amount of resources they consume. The activity rate provides a way to measure the cost per unit of the activity driver, which is the basis for applying overhead costs to products or services. Here's a detailed explanation of the correct formula:

a. Divide the total activity cost by the total activity driver:

This formula is used to determine the cost per unit of the activity driver. The total activity cost is the sum of all expenses related to a specific activity, including materials, labor, and overhead. The activity driver is a factor that creates the cost, such as machine hours, labor hours, or the number of setups.

For example, if the total cost for a machine setup activity is $100,000 for a year and there are 500 setups in that year, the activity rate would be calculated as:

`\[ \text{Activity Rate} = \frac{\text{Total Activity Cost}}{\text{Total Activity Driver}} = \frac{\$100,000}{500 \text{ setups}} = \$200 \text{ per setup} \]`

This activity rate can then be used to allocate the machine setup costs to products based on the number of setups each product requires.

The other options provided do not correctly describe the calculation of an activity rate:

b. Divide the total activity driver by the total activity cost:

This would give you the inverse of the activity rate, which is not meaningful for cost allocation purposes.

c. Multiply the total activity cost by the total activity driver:

Multiplication would not yield a rate but rather the square of the cost, which does not make sense in this context.

d. Add the total activity driver to the activity cost:

Adding the two together does not provide a rate or a meaningful figure for allocating costs.

In summary, option a is the correct method for computing an activity rate. It allows businesses to accurately allocate costs based on the actual consumption of resources by different products or services, leading to more precise product costing and profitability analysis.