Patten Company uses activity-based costing (ABC)

Full Answer Section

Data:

• Total budgeted overhead costs for plastic injection molding = $492,000 x 90% = $442,800
• Activity base (pounds of plastic molded) = 1,940,000 pounds

Calculation:

• Activity rate = $442,800 / 1,940,000 pounds
• Activity rate = $0.2282 per pound (rounded to the nearest cent)

Therefore, the activity rate for plastic injection molding is $0.2282 per pound.

2. Decal Application Activity Rate:

Formula:

• Activity rate = Total budgeted overhead costs / Activity base

Data:

• Total budgeted overhead costs for decal application = $492,000 x 10% = $49,200
• Activity base (number of decals applied) = 197,000 decals

Calculation:

• Activity rate = $49,200 / 197,000 decals
• Activity rate = $0.2503 per decal (rounded to the nearest cent)

Therefore, the activity rate for decal application is $0.2503 per decal.

Additional Analysis:

• This analysis helps Patten Company allocate overhead costs more accurately to each product based on the resources consumed during production.
• Knowing the activity rates allows Patten to identify cost drivers and improve production efficiency.
• By analyzing activity-based cost data, Patten can make more informed pricing and product mix decisions.

Limitations:

• Activity-based costing requires accurate activity data and careful selection of cost drivers.
• Implementing and maintaining an ABC system can be complex and expensive.

Overall, activity-based costing provides Patten Company with valuable insights into its production costs and allows for more accurate cost allocation and decision making.

Sample Solution

Activity-Based Costing for Patten Company

This document analyzes Patten Company's activity-based costing (ABC) system for its toy car production. It focuses on calculating the activity rates for the two main activities: plastic injection molding and decal application.

1. Plastic Injection Molding Activity Rate:

Formula:

• Activity rate = Total budgeted overhead costs / Activity base