Question

Saludable Company produces two types of get-well cards: scented and regular. Drivers for the four activities are as follows:

Scented Cards Regular Cards
Inspection hours 100 90
Setup hours 90 30
Machine hours 170 630
Number of moves 210 55
The following activity data has been collected:

Inspecting products $4,930
Setting up equipment 4,700
Machining 6,500
Moving materials 1,370
Required:

1. Calculate the consumption ratios for the four drivers. Round your answers to two decimal places.

Scented Cards Regular Cards
Inspection hours
Setup hours
Machine hours
Number of moves
2. Which of the following statements indicate there is product diversity?

Explain the significance of product diversity for decision making if the company chooses to use machine hours to assign all overhead.

If machine hours are used as the only driver, cards would receive 21% of the overhead, and cards would receive 79% of the overhead. Yet, the cards consume well over 53% of the non-machine related overhead. Thus, the Scented cards are , and the Regular cards are . This inaccuracy can adversely affect many decisions, including pricing, keep or drop, and cost-volume-profit.

3. Calculate the activity rates that would be used to assign costs to each product. Round your answers to the nearest cent.

Rates:
Inspecting products $ per inspection hour
Setting up equipment $ per setup hour
Machining $ per machine hour
Moving materials $ per move
4. Suppose that the activity rate for inspecting products is $20 per inspection hour. How many hours of inspection are expected for the coming year? If required, round your answer to nearest whole number of hours.
inspection hours

Answer 1

Answer: (1) scented card inspection hours 0.53, set up hours 0.75, machine hour 0.21, Number of moves 0.76, Regular cards inspection hours 0.47, set up hours 0.25, machine hours 0.79, Number of moves 0.24 (2) Activity based costing is based on the kind of cost which made it easier to trace cost to each product. (3) inspecting product $26, set up equipment $39.20, machining $8.13, moving materials $5.10, (4) hours of inspection expected 247 hours

Step-by-step explanation:

(1) To calculate the consumption ratio, we use the formula

Consumption ratio = Amount of activity driver per product / Total driver quantity

Total driver quantity

Inspection hours = 100 + 90 = 190

Set up hours = 90 + 30 = 120

Machine hours = 170 + 630 = 275

Scented cards

Inspection hours = 100/190

= 0.53

Set up hours = 90/ 120

=0.75

Machine hours = 170/800

= 0.21

Number of moves = 210/275

=0.76

Regular cards

Inspection hours = 90/190

=0.47

Set up hours = 30/ 120

= 0.25

Machine hours = 630/800

= 0.79

Number of moves = 65/275

= 0.24

(2) in ABC, cost pool is based on the kind of cost. In ABC, it is easier to trace cost to each products.The ABC also indicates the resources used in the production of the products which had not been properly used in the course of producing the product. Since cards receive 21% and 79% of overhead and also 53% of the non machine related overhead. It will have effect on the keep or drop and cost volume profit.

(3) To calculate the activity rates we use the formula

Activity rates = Cost pool total / Cost driver

Inspection product = 4930 / 190

= 25.9

$26 approximately

Setting up equipment = 4700/120

= 39.16

$39.20 Approximately

Machining = 6500/800

= 8.125

=$8.13 Approximately

Moving materials = 1,370/275

= 4.98

= $5.10pproximately

To calculate the hours of inspection expected for the coming years

Hours of inspection = Cost pool total / Amount per inspection hour

= 4930/ 20

= 246.5

247 hours Approximately

Answer 2

1.Consumption ratios for the four drivers in relation to both the cards will be consumption for a particular card/total consumption for both the cards which will be as follows :-

Scented cards Regular cards Inspection hours 100/190=0.53 90/190=0.47 Set up hours 90/120=0.75 30/120=0.25 Machine hours 170/800=0.21 630/800=0.79 Number of moves 210/265=0.79 55/265=0.21

2 .There has been diversification of different activities or drivers among both the products, thus increasing significance of activity Based distribution of overheads. Since if we use blanket rate for allocation of overhead on the basis of machine hours, it will certainly leads to a distorted view as machine hours are significantly higher in case of regular cards whereas consumption of other resources is comparatively lower for it. This, in such a situation its significance certainly gets increased.

3. Activity rates which could be used to assign cost to each product will be calculated as Total cost for the driver/number of units of that driver. It is calculated in the table as follows :-

(A) ( B ) number of units (C=A=B) cost per unit Driver/activity total (hours) of (hour) of cost driver/activity driver/activity

Total cost for the driver/number of units of that driver. It is calculated in the table as follows :-

Driver/activity (A) total cost ( B ) number of units (hours) of driver/activity (C=A=B) cost per unit (hour) of driver/activity Inspecting products 4930 190 (100+90) 25.95 Setting up equipment 4700 120 (90+30) 39.17 Machining 6500 800 (170+630) 8.13 Moving material 1370 265 (210+55) 5.17

4 . We have total inspection cost as 4930 And activity rate for inspecting product is $20per inspecting hour This total inspecting hours will be = 4930/20=246.5 hours Thus total inspection hours would be 246.5.