Larsen, Inc., produces two types of electronic parts and has provided the following data:
There are four activities: machining, setting up, testing, and purchasing.
Required:
1. Calculate the activity consumption ratios for each product.
2. Calculate the consumption ratios for the plantwide rate (direct labor hours). When compared with the activity ratios, what can you say about the relative accuracy of a plantwide rate? Which product is undercosted?
3. What if the machine hours were used for the plantwide rate? Would this remove the cost distortion of a plantwide rate?
SOLUTION
1.
Consumption Ratios
Overhead Activity Part X12 Part YK7 Activity Driver
Machining 0.14a 0.86a Machine hours
Setups 0.33b 0.67b Number of setups
Inspecting products 0.10c 0.90c Testing hours
Purchasing 0.13d 0.87d Purchase orders
a50,000/350,000 (Part X12) and 300,000/350,000 (Part YK7)
b40/120 (Part X12) and 80/120 (Part YK7)
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