Activity-Based Product Costing
Sweet Sugar Company manufactures three products (white sugar, brown sugar, and powdered sugar) in a continuous production process. Senior management has asked the controller to conduct an activity-based costing study. The controller identified the amount of factory overhead required by the critical activities of the organization as follows:
| Activity | Budgeted Activity Cost | |||
| Production | $500,000 | |||
| Setup | 144,000 | |||
| Inspection | 44,000 | |||
| Shipping | 115,000 | |||
| Customer Service | 84,000 | |||
| Total | $887,000 | |||
The activity bases identified for each activity are as follows:
| Activity | Activity Base |
| Production | Machine hours |
| Setup | Number of setups |
| Inspection | Number of inspections |
| Shipping | Number of customer orders |
| Customer Service | Number of customer service requests |
The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:
| Machine Hours | Number of Setups | Number of Inspections | Number of Customer Orders | Customer Service Requests | Units | |||||||||||||
| White sugar | 5,000 | 85 | 220 | 1,150 | 60 | 10,000 | ||||||||||||
| Brown sugar | 2,500 | 170 | 330 | 2,600 | 350 | 5,000 | ||||||||||||
| Powdered sugar | 2,500 | 195 | 550 | 2,000 | 190 | 5,000 | ||||||||||||
| Total | 10,000 | 450 | 1,100 | 5,750 | 600 | 20,000 | ||||||||||||
Each product requires 0.5 machine hour per unit.
Required:
If required, round all per unit amounts to the nearest cent.
1. Determine the activity rate for each activity.
| Production | $ per machine hour |
| Setup | $ per setup |
| Inspection | $ per inspection |
| Shipping | $ per cust. ord. |
| Customer service | $ per customer service request |
2. Determine the total and per-unit activity cost for all three products.
| Total Activity Cost | Activity Cost Per Unit | |
| White sugar | $ | $ |
| Brown sugar | ||
| Powdered sugar |
3. Why aren’t the activity unit costs equal across all three products since they require the same machine time per unit?
The unit costs are different because the products consume many activities in ratios different from the _____ sales mix or volume.
