Question

Activity-Based Product Costing

Sweet Sugar Company manufactures three products (white sugar, brown sugar, and powdered sugar) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:
Activity Budgeted Activity Cost
Production $471,200
Setup 310,800
Inspection 81,000
Shipping 156,000
Customer service 65,500
Total $1,084,500
The activity bases identified for each activity are as follows:
Activity Activity Base
Production Machine hours
Setup Number of setups
Inspection Number of inspections
Shipping Number of customer orders
Customer service Number of customer service requests
The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:
Machine Hours Number of
Setups Number of
Inspections Number of
Customer Orders Customer
Service
Requests Units
White sugar 3,340 180 200 780 50 8,350
Brown sugar 2,130 270 300 2,150 320 5,325
Powdered sugar 2,130 250 500 970 130 5,325
Total 7,600 700 1,000 3,900 500 19,000
Each product requires 0.9 machine hour per unit.
Required:
If required, round all per unit amounts to the nearest cent.
1. Determine the activity rate for each activity.
Production $ per machine hour
Setup $ per setup
Inspection $ per move
Shipping $ per cust. ord.
Customer service $ per customer service request
2. Determine the total and per-unit activity cost for all three products.
Total Activity Cost Activity Cost Per Unit
White sugar $ $
Brown sugar
Powdered sugar
3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?
The unit costs are different because the products consume many activities in ratios different from the .

Answer 1

Activity-based costing allocates overhead costs based on activities consumed. To determine activity rates, divide budgeted activity costs by activity bases. Total activity costs and activity costs per unit are determined by multiplying activity rates by activity bases and dividing by number of units.

Step-by-step explanation:

The basis of activity-based costing is to allocate overhead costs to products based on the activities that they consume. To calculate the activity rate for each activity, you divide the budgeted activity cost by the activity base. For example, to determine the activity rate for production, divide the budgeted activity cost for production by the total machine hours. The activity rates for production, setup, inspection, shipping, and customer service would be $ per machine hour, $ per setup, $ per inspection, $ per customer order, and $ per customer service request, respectively.

To determine the total activity cost for each product, multiply the activity rate by the activity base for each product. For example, to calculate the total activity cost for white sugar, multiply the activity rate for production by the machine hours for white sugar. Then, divide the total activity cost by the number of units produced to determine the activity cost per unit. Repeat this process for brown sugar and powdered sugar.

The activity unit costs are not equal across all three products because the products consume different amounts of each activity. Even though each product requires the same amount of machine time per unit, the ratios of other activities are different for each product, resulting in different activity costs.