Mello Manufacturing Company is a diversified manufacturer that manufactures three products (Alpha, Beta, and Omega) 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:
1. Activity Activity Cost Pool
2. Production $259,200
3. Setup 55,000
4. Materials handling 9,750
5. Inspection 60,000
6. Product engineering 123,200
7. Total $507,150
The activity bases identified for each activity are as follows:
Activity Activity Base
Production Machine hours
Setup Number of setups
Materials handling Number of parts
Inspection Number of inspection hours
Product engineering Number of engineering hours
The activity-base usage quantities and units produced for the three products were determined from corporate records and are as follows:
Machine Number of Number of Number of Number of
Hours SetupsParts Inspection Hours Engineering Hours Units
Alpha 1,440 75 65 400 125 1,800
Beta 1,080 165 80 300 175 1,350
Omega 720 310 180 500 140 900
Total 3,240 550 325 1,200 440 4,050
Each product requires 40 minutes per unit of machine time.
Required:
1. Determine the activity rate for each activity.*
2. Use the activity rates in (1) to determine the total and per-unit activity costs associated with all three products.*
3. Why arenât the activity unit costs equal across all three products since they require the same machine time per unit?
* If required, round all per-unit amounts to the nearest cent.