A company uses activity-based costing to determine the costs of its three produc
ID: 2540599 • Letter: A
Question
A company uses activity-based costing to determine the costs of its three products: A, B, and C. The budgeted cost and activity for each of the company's three activity cost pools are shown in the following table:
Budgeted Activity
Activity Cost Pool
Budgeted Cost
Product A
Product B
Product C
Activity 1
$70,000
6,000
9,000
20,000
Activity 2
$45,000
7,000
15,000
8,000
Activity 3
$82,000
2,500
1,000
1,625
Budgeted Activity
Activity Cost Pool
Budgeted Cost
Product A
Product B
Product C
Activity 1
$70,000
6,000
9,000
20,000
Activity 2
$45,000
7,000
15,000
8,000
Activity 3
$82,000
2,500
1,000
1,625
Explanation / Answer
Answer is option b i.e. The activity rate under the activity-based costing system for Activity 2 is $1.50.
Calculations:
The Activity Rate under Activity Based Costing system is calculated as follows:
Activity Rate = Total Overhead Cost of the Activity / Total of Activity
Therefore,
Activity Rate for Activity 2 = 45000 / (7000+15000+8000)
Activity Rate for Activity 2 = 45000 / 30000
Activity Rate for Activity 2 = $ 1.5
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