EyeGuard Equipment Inc. (EEI) manufactures protective eyewear for use in commercial and home...
Question:
EyeGuard Equipment Inc. (EEI) manufactures protective eyewear for use in commercial and home applications. The product is also used by hunters, home woodworking hobbyists, and in other applications. The firm has two main product lines-the highest-quality product is called Safe-T, and a low-cost, value version is called Safe-V. Information on the factory conversion costs for EEI is as follows:
| Factory Costs | |
| Salaries | $850,000 |
| Supplies | 150,000 |
| Factory expense | 550,000 |
| $1,550,000 |
EEI uses ABC costing to determine the unit costs of its products. The firm uses resource consumption cost drivers based on rough estimates of the amount that each activity consumes, as shown below. EEI has four activities: job setup, assembly, inspecting and finishing, and packaging.
| Setup | Assembly | Inspecting & Finishing | Packaging | Total | |
| Salaries | 15% | 55% | 20% | 10% | 100% |
| Supplies | 20 | 60 | 20 | 100 | |
| Factory expense | 80 | 20 | 100 |
The activity cost drivers for the two products are summarized below.
| Activities | Activity Driver |
| Setup | Batch |
| Assembly | Units |
| Inspect and finishing | Hours |
| Packaging | Hours |
| Safe-V | Safe-T | |
| Batches | 250 | 600 |
| Units | 60,000 | 72,000 |
| Finishing hours, per unit | 0.2 | 0.3 |
| Packaging hours, per unit | 0.1 | 0.15 |
| Materials per unit | $3.50 | $6.00 |
Determine the amount of the cost pool for each of the four activities.
Determine the activity-based rates for assigning factory costs to the two products.
Determine the activity-based unit cost for each of the products.
What is the strategic role of the information obtained in requirement 3?
The quantities of resource consumption cost drivers used were based on rough estimates. Under what conditions would you recommend that more accurate cost driver data be collected?
Activity Based Costing
The use of activity-based costing is a refinement of the traditional overhead cost allocation system as it results in more accurate product costs. This is achieved by tracking manufacturing overhead activities to individual products instead of allocating overhead costs using a single cost driver. It is however imperative that a company should try to weight costs and benefits of using an activity-based costing system.
Answer and Explanation: 1
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| Setup | Assembly | Inspecting and Finishing | Packaging | |
| Salaries | 127,500 | 467,500 | 170,000 | 85,000 |
| Supplies | 30,000 | 90,000 | 30,000 | 0 |
| Factory... |
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Chapter 7 / Lesson 2The activity-based costing method finds the overhead cost by including all activities required for production. Examine the various cost drivers and cost pools to see the importance of understanding these concepts when calculating overhead with accuracy.