Question

Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) 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 Activity Cost Pool
Production $259,200.00
Setup 55,000.00
Material handling 9,750.00
Inspection 60,000.00
Product engineering 123,200.00
Total $507,150.00

The activity bases identified for each activity are as follows:


Activity Activity Base
Production Machine hours
Setup Number of setups
Material handling Number of parts
Inspection Number of inspection hours
Product engineering Number of engineering hours

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 Setup Number of parts Number of inspection hours Number of engineering hours Units
Alpha 1,440 75 65 400 125 1,800
Beta 1,080 165 80 300 175 1,350
Omega 720 310 180 500 140 900
Total 3,240 550 325 1,200 440 4,050


Each product requires 40 minutes per unit of machine time.

Required:
a. Complete the Activity Tables for Alpha, Beta and Omega.
b. Determine the activity rate for each activity.
c. Use the activity rates in (1) to determine the total and per-unit activity costs associated with all three products.
d. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?

Answer 1

Attached are the detailed solution tables for

A) complete the activity rate for each activity is a general question covering so solution starts from B

B) calculation of the activity rate for each activity: shown in the attached table

C) activity cost per unit : alpha = $99.81, Beta = $125.41, 0mega = $175.78

D ) The activity unit costs are not equal across all three products because of different activity bases such as machine hours, setups, parts and inspection hours that also determines the activity cost

Step-by-step explanation:

A) complete the activity rate for each activity is a general question covering so solution starts from (B)

B) calculation of the activity rate for each activity: shown in the attached table

C) Calculation of activity cost of all products

activity cost of each product = use of product activity * activity rate

production = ($80 * Machine hours of each product )

setup = ( $100 * number of setups for each product )

Material handling = ( $30 * number of parts of each product )

Inspection = ( $50 * number of inspection hours for each product )

Product engineering = ( $280 * number of engineering hour for each product )

Activity cost per unit = total cost of activity of each product / unit produced for each product

D) The activity unit costs are not equal across all three products because of different activity bases such as machine hours, setups, parts and inspection hours that also determines the activity cost