Activity-based and department rate product costing and product cost distortions

Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as   follows:

 

Indirect labor	$507,000
Cutting Department	156,000
Finishing Department	   192,000

Total                                                                                         $855,000

 

The activity base associated with the two production departments is direct labor  hours.

The indirect labor can be assigned to two different activities as follows:

 

Activity                                                       Budgeted Activity Cost                                     Activity Base

 

Production control	$237,000	Number of production runs
Materials handling	270,000	Number of moves

 

_ Â

Total

 

The activity-base usage quantities and units produced for the two products follow:

 

Â	Number of Production Runs	  Number of Moves	  Direct Labor Hours—Cutting	  Direct Labor Hours—Finishing	  Units Produced
Snowboards	430	5,000	4,000	2,000	6,000
Skis	  70	 2,500	 2,000	 4,000	  6,000
Total	500	 7,500	 6,000	 6,000	12,000

 

Instructions

1.     .  Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is $315,000 and $540,000 for the Cutting and Finishing departments, respectively.

2.     .  Determine the total and per-unit factory overhead costs allocated to each product, using the multiple production department overhead rates in (1).

3.     . Determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments.

4.     .  Determine the total and per-unit cost assigned to each product under activity-based costing.

5.     Explain the difference in the per-unit overhead allocated to each product under the multiple production department factory overhead rate and activity-based costing methods.