Activity-Based Costing and Product Cost Distortion Memory Disk Inc. is consideri

Question

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 4,000 direct labor hours. The total indirect labor is budgeted to be $288,000.

Time records from indirect labor employees revealed that they spent 60% of their time setting up production runs and 40% of their time supporting actual production. The following information about CDs and DVDs was determined from the corporate records:

If required, round your answers to the nearest cent.

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.

Nuber of Setups Direct Labor Hours Units CDs 1,600 2,000 60,000 DVDs 800 2,000 60,000 Total 2,400 4,000 120,000

Explanation / Answer

Indirect labour cost $     288,000.00 Total Direct Labour hour 4000 Indirect labour cost per hour $                72.00 Question a. Cds (2000 x $72/60000) $                  2.40 DVDs (2000 x $72/60000) $                  2.40 Question b. Set up costs @60% of 288,000 $     172,800.00 Production support cost $     115,200.00 Budgeted Activity cost Activity Rate Set up $     172,800.00 $            72.00 per setup Production support $     115,200.00 $            28.80 per direct labour hour Question c. CDs DVDs Setup costs(no of setups x $72) $     115,200.00 $   57,600.00 Production support (direct labour hour x 28.80) $       57,600.00 $   57,600.00 Total Cost $     172,800.00 $ 115,200.00 No of units 60000 60000 Indirect labour cost per unit $                  2.88 $              1.92

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