Question

Consumption Ratios; Activity Rates 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 1,080 720
Setup hours 420 180
Machine hours 960 2,880
Number of moves 2,880 720
The following activity data has been collected:
Inspecting products $45,000
Setting up equipment 28,500
Machining 30,720
Moving materials 16,200
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?

Answer 1

Saludable Company

Consumption Ratios= Amount of Activity per driver /Total Driver Quantity

Scented Cards Regular Cards Total

A B C

Inspection hours 1,080 720 1800

Setup hours 420 180 600

Machine hours 960 2,880 3840

Number of moves 2,880 720 3600

Consumption Ratios

Scented Cards Regular Cards

A/ C B /C

Inspection hours 1,080/1800 720/1800

0.6 0.4

Setup hours 420/600 180/600

0.7 0.3

Machine hours 960/3840 2,880/3840

0.25 0.75

Number of moves 2,880/3600 720/3600

0.8 0.2

2. Diverse products consume activities in different amounts. When they are different product line with diversification the product cost may vary than the actual costs IF ABC is not used. ABC helps removal of un necessary amounts allocated and assigns actual costs incurred.

The Scented cards are more costly than the Regular card. If machine hours are used as the only driver,Scented cards cards would receive 21% of the overhead, and Regular cards would receive 79% of the overhead. This shows that Scented cards are under costed and Regualr Cards are over costed if ABC is not used.

3. Activity Rate= Activity Cost/ Cost Driver

Activity

Inspecting products /Inspection hours= $45,000/1800= 25 $ per inspection hour

Setting up equipment/Setup hours= 28,500/600= $ 47.5 per setup hour

Machining/Machine hours = 30,720/3840 = $8 per machine hour

Moving materials /Number of moves=16,200/3600 = $ 4.5 per move

4. Activity Rate= Activity Cost/ Cost Driver

$ 20= $ 45000/ Hours

Hours = $ 45000/20 = 2250 inspection hours are expected for the coming year.