Activity-based costing and product cost distortion
Response to the following problem:
Digital Storage Concept Inc. is considering a change to activity-based product costing. The company produces two products, cell phones and tablet PCs, in a single production department. The production department is estimated to require 3,750 direct labor hours. The total indirect labor is budgeted to be $375,000.
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 cell phones and tablet PCs was determined from the corporate records:
| |
Number ofSetups |
Direct LaborHours |
Units |
|
Cell phones
|
600
|
1,875
|
93,750
|
|
Tablet PCs
|
1,400
|
1,875
|
93,750
|
|
Total
|
2,000
|
3,750
|
187,500
|
a. Determine the indirect labor cost per unit allocated to cell phones and tablet PCs 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)?