Sarno Corporation has an activity-based costing system with three activity cost

Question

Sarno Corporation has an activity-based costing system with three activity cost pools- Processing, Batch Setup, and Other. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Batch Setup cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the two products and the company's costs and activity-based costing system appear below:

Required:

a. Calculate activity rates for each activity cost pool using activity-based costing.

b. Determine the amount of overhead cost that would be assigned to each product using activity-based costing.

c. Determine the product margins for each product using activity-based costing.

Explanation / Answer

Req A: Activity cost rate Processing cost = Total Activity / Number of Machine hours (3000 /10,000) = $ 0.30 per machine hour batch setup = Activity cost / Number of batches (9800/1000 ) = $ 9.80 per batch Req B: Allocation of activity cost: Product 1 Product 2 Number of MHs 5800 4200 Number of Batches 700 300 Activity cost allocated: Processing(@0.30 per MH) 1740 1260 Batch setup (@9.80 per batch) 6860 2940 Total cost of activity 8600 4200 ReqC: Profit margin of product Product 1 Product 2 Sales 45300 48400 Less: Cost Direct material 19600 16900 Direct Labour 15900 24200 Activity cost as allocated 8600 4200 Profit margin 1200 3100

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