91Ó°ÊÓ

Aerobic Lifestyles Inc. manufactures stationary bicycles and rowing machines. The products are produced in the Fabrication and Assembly production departments. In addition to production activities, several other activities are required to produce the two products. These activities and their associated activity rates are as follows: \begin{tabular}{ll} \multicolumn{1}{c}{ Activity } & \multicolumn{1}{c}{ Activity Rate } \\ \hline Fabrication & \(\$ 24\) per machine hour \\ Assembly & \(\$ 12\) per direct labor hour \\ Setup & \(\$ 40\) per setup \\ Inspecting & \(\$ 24\) per inspection \\ Production scheduling & \(\$ 14\) per production order \\ Purchasing & \(\$ 5\) per purchase order \end{tabular} The activity-base usage quantities and units produced for each product were as follows: \begin{tabular}{lrc} & Stationary Bicycle & Rowing Machine \\ \hline Machine hours & 1,795 & 988 \\ Direct labor hours & 448 & 176 \\ Setups & 45 & 16 \\ Inspections & 700 & 400 \\ Production orders & 70 & 12 \\ Purchase orders & 180 & 120 \\ Units produced & 800 & 800 \end{tabular} use the activity rate and usage information to calculate the total activity costs and the activity costs per unit for each product.

Step by step solution

01

Calculate Fabrication Costs

First, determine the total cost incurred from Fabrication using the formula: \( \text{Fabrication Cost} = \text{Machine Hours} \times \text{Fabrication Rate} \). For the Stationary Bicycle, it is \(1795 \times 24 = \\(43,080\). For the Rowing Machine, \(988 \times 24 = \\)23,712\).

02

Calculate Assembly Costs

Next, calculate the Assembly costs using: \( \text{Assembly Cost} = \text{Labor Hours} \times \text{Assembly Rate} \). For the Stationary Bicycle, it is \(448 \times 12 = \\(5,376\). For the Rowing Machine, it is \(176 \times 12 = \\)2,112\).

03

Calculate Setup Costs

For Setup costs, use: \( \text{Setup Cost} = \text{Setups} \times \text{Setup Rate} \). For the Stationary Bicycle, it is \(45 \times 40 = \\(1,800\). For the Rowing Machine, \(16 \times 40 = \\)640\).

04

Calculate Inspecting Costs

Calculate Inspecting costs with the formula: \( \text{Inspecting Cost} = \text{Inspections} \times \text{Inspecting Rate} \). For Stationary Bicycle: \(700 \times 24 = \\(16,800\). For Rowing Machine: \(400 \times 24 = \\)9,600\).

05

Calculate Production Scheduling Costs

Determine the Production Scheduling costs: \( \text{Production Scheduling Cost} = \text{Production Orders} \times \text{Scheduling Rate} \). Stationary Bicycle: \(70 \times 14 = \\(980\). Rowing Machine: \(12 \times 14 = \\)168\).

06

Calculate Purchasing Costs

Finally, calculate Purchasing costs using: \( \text{Purchasing Cost} = \text{Purchase Orders} \times \text{Purchasing Rate} \). For Stationary Bicycle: \(180 \times 5 = \\(900\). For Rowing Machine: \(120 \times 5 = \\)600\).

07

Total Activity Costs

Add all the costs together to find the Total Activity Costs for each product. Stationary Bicycle: \(43,080 + 5,376 + 1,800 + 16,800 + 980 + 900 = \\(68,936\). For Rowing Machine: \(23,712 + 2,112 + 640 + 9,600 + 168 + 600 = \\)36,832\).

08

Calculate Activity Costs Per Unit

Divide the Total Activity Costs by the number of units produced to find the Activity Cost Per Unit. For the Stationary Bicycle: \(68,936 / 800 = \\(86.17\) per unit. For the Rowing Machine: \(36,832 / 800 = \\)46.04\) per unit.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Cost Allocation

Cost allocation is an essential concept in understanding how businesses distribute total costs to specific products or departments. It is particularly important in multi-product manufacturing environments like Aerobic Lifestyles Inc., where stationary bicycles and rowing machines utilize various activities and resources. Cost allocation aims to assign costs, such as direct labor, materials, and overhead, to the correct cost objects.

• This ensures accurate product costing.
• It helps in determining the profitability of each product.

In our exercise, different activities, each with its own activity rate, are used to allocate costs. By multiplying activity rates by their respective usage quantities (like machine hours or labor hours), these costs are then assigned to stationary bikes and rowing machines. This process illustrates how cost allocation provides a clear picture of how and where resources are consumed.

Activity Costs

Activity costs, central to Activity-Based Costing (ABC), represent the actual costs incurred from each business activity directly associated with production. Understanding activity costs helps in identifying areas where businesses can improve or reduce expenses. In the context of Aerobic Lifestyles Inc., activity costs are calculated for activities such as Fabrication, Assembly, Setup, Inspecting, Production Scheduling, and Purchasing. For instance:

• Fabrication: The number of machine hours times the fabrication rate.
• Assembly: Direct labor hours multiplied by the assembly rate.

These calculations lead to determining the cost of performing each activity, ensuring transparent product cost tracking. This insight helps managers in pinpointing cost-heavy processes and evaluating their necessity or efficiency.

Manufacturing Overhead

Manufacturing overhead includes all the indirect costs associated with producing a product, excluding direct materials and direct labor. It represents costs essential for production but not directly traceable to a specific unit of product. In the original exercise, overheads are part of the broader category of activity costs, encompassing costs from several supporting activities:

• Inspecting costs may include wages for staff conducting inspections.
• Setup costs might capture expenses related to preparing machines for production runs.

For Aerobic Lifestyles Inc., manufacturing overhead costs are critical in determining the realistic cost per unit of the stationary bicycles and rowing machines. This data empowers companies to accurately price products, ensure profitability, and retain competitiveness in the market.

Cost Management

Cost management involves planning, controlling, and minimizing costs without compromising on quality. In manufacturing, it ensures resources are efficiently used and wastage is minimized, leading to higher profitability. By employing Activity-Based Costing as shown in the exercise, Aerobic Lifestyles Inc. gains better insights into its cost drivers. With detailed understanding of activity costs:

• They can refine cost estimates and improve strategic decision-making.
• It helps identify non-value adding activities to potentially eliminate.

Regular monitoring and improving cost management processes can result in substantial savings. This makes cost management a vital tool for businesses looking to optimize operational efficiency and boost their bottom line.