Patten Company uses activity-based costing (ABC)
Patten Company uses activity-based costing (ABC). Patten manufactures toy cars using two activities: plastic injection molding and decal application. Patten's 20X1 total budgeted overhead costs for these two activities are $492,000 (90% for injection molding and 10% for decal application). Molding overhead costs are driven by the number of pounds of plastic that are molded together. Decal application overhead costs are driven by the number of decals applied to toys. The budgeted activity data for 20X1 are as follows:
Line Item DescriptionNumerical DataPounds of plastic molded1,940,000Number of decals applied197,000
Required:
1. Calculate the activity rate for the plastic injection molding activity. Round your answer to the nearest cent.
fill in the blank 1 of 1$ per pound molded
2. Calculate the activity rate for the decal application activity. Round your answer to the nearest cent.
fill in the blank 1 of 1$ per decal applied
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
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.