PE 25-9B Activity-based costing

Casual Cuts Inc. has total estimated factory overhead for the year of $225,000, divided into four activities: cutting, $90,000; sewing, $22,500; setup, $80,000; and inspection, $32,500. Casual Cuts manufactures two types of men’s pants: jeans and khakis. The activity-base usage quantities for each product by each activity are as follows:

  Cutting Sewing Setup Inspection

Jeans   500 dlh 1,000 dlh   250 setups 100 inspections

Khakis 1,000   500   750 400

1,500 dlh 1,500 dlh 1,000 setups 500 inspections

Each product is budgeted for 10,000 units of production for the year.  Determine (a) the activity rates for each activity and (b) the factory overhead cost per unit for each product, using activity-based costing.

Answer:

a. Cutting: $90,000 ÷ 1,500 direct labor hours = $60 per dlh 

Sewing: $22,500 ÷ 1,500 direct labor hours = $15 per dlh 

Setup: $80,000 ÷ 1,000 setups = $80 per setup 

Inspection: $32,500 ÷ 500 inspections = $65 per inspection 

b. Jeans Khakis 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Activity- 

Base Activity Activity 

Usage × Rate = Cost 

Cutting 500  dlh $60  /dlh $30,000 1,000  dlh $60  /dlh $ 60,000 

Sewing 1,000  dlh $15  /dlh 15,000 500  dlh $15  /dlh 7,500 

Setup 250  setups $80  /setup 20,000 750  setups $80  /setup 60,000 

Inspection 100  insp. $65  /insp. 6,500 400  insp. $65  /insp. 26,000 

Total $71,500  $153,500 

÷ Budgeted units to be produced ÷  10,000  ÷  10,000 

Factory overhead per unit $ 7.15  $ 15.35