Volt Gear Industries manufactures two types of electrical power units, custom and standard, which involve four overhead activities—production setup, procurement, quality control, and materials management. An activity analysis of the overhead revealed the following estimated costs and activity bases for these activities:
|
Activity |
Cost |
Activity Base |
|
Production setup |
$ 48,000 |
Number of setups |
|
Procurement |
118,000 |
Number of purchase orders |
|
Quality control |
160,000 |
Number of inspections |
|
Materials management |
115,000 |
Number of components |
|
Total |
$441,000 |
|
The activity base usage quantities for each product are as follows:
|
|
|
Purchase |
|
|
|
|
|
Setups |
Orders |
Inspections |
Components |
Unit Volume |
|
Custom |
375 |
900 |
1,800 |
300 |
3,000 |
|
Standard |
125 |
100 |
200 |
200 |
3,000 |
|
Total |
500 |
1,000 |
2,000 |
500 |
6,000 |
a. Determine an activity rate for each activity.
b. Assign activity costs to each product, and determine the unit activity cost using the activity rates from part (a).
c. Assume that each product required one direct labor hour per unit. Determine the per unit cost if factory overhead is allocated on the basis of direct labor hours.
d. Explain why the answers in parts (b) and (c) are different.