Cost Management: A Strategic Emphasis 5th Edition by David Stout, Edward Blocher, Gary Cokins

Exercise 9

Resource and Activity-Based Cost Drivers 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	Inspect&Finishing	Packaging
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

Required

1. Determine the amount of the cost pool for each of the four activities.

2. Determine the activity-based rates for assigning factory costs to the two products.

3. Determine the activity-based unit cost for each of the products.

4. What is the strategic role of the information obtained in part 3?

Step 1 of 5

Activity based costing method which is commonly known as ABC method, is a costing method where indirect cost is assigned to product on the basis of activities identified, used in producing the product.