Analyze Life Force Fitness, Inc.
Life Force Fitness, Inc., assembles and sells treadmills. Activity-based product information for each treadmill is as follows:
Activity Activity-Base Usage (hrs. per unit) X Activity Rate per Hour = Activity Cost
Motor assembly 1.50 $20 $30.00
Final assembly 1.00 18 18.00
Testing 0.25 22 5.50
Rework 0.40 22 8.80
Moving 0.20 15 3.00
Activity cost per unit $65.30
All of the activity costs are related to labor. Management must remove $2.00 of activity cost from the product in order to remain competitive.
Rework involves disassembling and repairing a unit that fails testing. Not all units require rework, but the average is 0.40 hours per unit. Presently, the testing is done on the completed assembly; but much of the rework has been related to motors, which can be tested independently prior to adding the motor to the treadmill during final assembly. Thus, motor issues can be diagnosed and solved without having to disassemble the complete treadmill. This change will reduce the average rework per unit by one-quarter.
Determine the new activity cost per unit under the rework improvement scenario. Round your answer to 2 decimal place.

Answer:

63.10

Explanation:

The computation of the new activity cost per unit is shown below:

Particulars        Activity-Base Usage     Activity rate  

Activity           (hrs. per unit)         per Hour            Activity Cost

Motor assembly         1.5                             20.00                     30.00

Final assembly           1.00                           18.00                      18.00

Testing                        0.25                          22.00                     5.50

Rework                       0.30                           22.00                    6.60

                           (0.40-  0.40  ÷ 4)          

Moving                        0.20                          15.00                      3.00

Activity cost per unit                                                                   63.10

Activity-based costing is one of the ways under cost accounting for the determination of the costs of units or products based upon the types of activities involved in producing the goods. It determines the unit cost of the product by taking the proportional ratio of each activity charged over the product.

The new activity cost per unit is $63.10.

The new activity cost per unit is determined as per the existing activity cost. All the costs per unit will remain the same while the activity usage will also remain the same except for the rework activity.

In the context of the given scenario, the rework cost will be reduced by $2, so it will change from 0.4 to 0.3.

The computation of the new activity cost per unit is shown in the image attached below.

To know more about activity-based cost, refer to the link:

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