Activity-based costing and product cost distortion
Four Finger Appliance Company manufactures small kitchen appliances. The product line consists of blenders and
toaster ovens. Four Finger Appliance presently uses the multiple production department factory overhead rate
method. The factory overhead is as follows:
Assembly Department
$186,000
Test and Pack Department 120,000
Total
$306,000
The direct labor information for the production of 7,500 units of each product is as follows:
Assembly Department Test and Pack Department
Blender
750 dlh
2,250 dlh
Toaster oven
2,250
750
Total
3,000 dlh
3,000 dih
Four Finger Appliance used direct labor hours to allocate production department factory overhead to products.
The management of Four Finger Appliance Company has asked you to use activity-based costing to allocate factory
overhead costs to the two products. You have determined that $81,000 of factory overhead from each of the
production departments can be associated with setup activity ($162,000 in total). Company records indicate that
blenders required 135 setups, while the toaster ovens required only 45 setups. Each product has a production
volume of 7,500 units.
If required, round all per unit answers to the nearest cent.
a. Determine the three activity rates (assembly, test and pack, and setup).
Assembly Activity
per dih
Test and Pack Activity
per dih
Setup Activity
900
per setup
b. Determine the total factory overhead and factory overhead per unit allocated to each product using the activity
rates in (a).
Product
Total Factory Overhead Factory Overhead Cost Per Unit
Blender
Toaster oven
$
$
$
$
