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Production-Based Costing versus Activity-Based Costing, Assigning Costs to Activities, Resource Drivers
Willow Company produces lawn mowers. One of its plants produces two versions of mowers: a basic model and a deluxe model. The deluxe model has a sturdier frame, a higher horsepower engine, a wider blade, and mulching capability. At the beginning of the year, the following data were prepared for this plant:
Facility-level costs are allocated in proportion to machine hours (provides a measure of time the facility is used by each product). Materials handling uses three inputs: two forklifts, gasoline to operate the forklift, and three operators. The three operators are paid a salary of $40,000 each. The operators spend 25 percent of their time on the receiving activity and 75 percent on moving goods (materials handling). Gasoline costs $3 per move. Depreciation amounts to $6,000 per forklift per year.
Required:
1. Calculate the cost of the materials handling activity. Label the cost assignments as driver tracing or direct tracing. Identify the resource drivers.
2. Calculate the cost per unit for each product by using direct labor hours to assign all overhead costs.
3. Calculate activity rates, and assign costs to each product. Calculate a unit cost for each product, and compare these costs with those calculated in Requirement 2.
4. Calculate consumption ratios for each activity.
5. Conceptual Connection: Explain how the consumption ratios calculated in Requirement 4 can be used to reduce the number of rates. Calculate the rates that would apply under this approach.
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