Reference no: EM132690663
Problem - Activity-based costing and product cost distortion
Memory Disk Inc. is considering a change to activity-based product costing. The company produces two products, CDs and DVDs, in a single production department. The production department is estimated to require 3,000 direct labor hours. The total indirect labor is budgeted to be $270,000.
Time records from indirect labor employees revealed that they spent 40% of their time setting up production runs and 60% of their time supporting actual production.
The following information about CDs and DVDs was determined from the corporate records:
|
Number of Setups
|
Direct Labor Hours
|
Units
|
|
CDs
|
500
|
1,500
|
75,000
|
|
DVDs
|
1,100
|
1,500
|
75,000
|
|
Total
|
1,600
|
3,000
|
150,000
|
Required -
a. Determine the indirect labor cost per unit allocated to CDs and DVDs under a single plantwide factory overhead rate system using the direct labor hours as the allocation base.
b. Determine the budgeted activity costs and activity rates for the indirect labor under activity-based costing. Assume two activities-one for setup and the other for production support.
c. Determine the activity cost per unit for indirect labor allocated to each product under activity-based costing.
d. Why are the per-unit allocated costs in (a) different from the per-unit activity cost assigned to the products in (c)?