Reference no: EM13949460

Wilson Company produces lawn mowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the begin- ning of the year, the following data were prepared for this plant:

                                                                              Basic Model             Deluxe Model

Expected quantity                                       40,000                 20,000

Selling price                                                $180                    $360

Prime costs                                                 $160                   $320

Machine hours                                            5,000                   5,000

Direct labor hours                                       10,000                 10,000

Engineering  support (hours)                       1,500                   4,500

Receiving (orders processed)                        250                     500

Material handling (number of moves)             1,200                   4,800

Purchasing (number of requisitions)              100                      200

Maintenance (hours used)                             1,000                  3,000

Paying suppliers (invoices processed)             250                     500

Setting up equipment (number of setups)      16                       64

Additionally, the following overhead activity costs are reported:

Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Material handling uses three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of $60,000 each. The operators spend 25 percent of their time on the receiving activity and 75 percent on moving goods (material handling).

Gasoline costs $4.50 per move. Depreciation amounts to $9,000 per forklift per year.

Required

1. Calculate the cost of the material-handling activity. Label the cost assignments as driver tracing and direct tracing. Identify the resource drivers.

2. Calculate the cost per unit for each product using direct labor hours to assign all overhead costs.

3. Calculate activity rates and assign costs to each product. Calculate a unit cost for each product and compare these costs with those calculated in Requirement 2.

4. Calculate consumption ratios for each activity.

5. Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. Calculate the rates that would apply under this approach.