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.
- 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
- 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
- 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.
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