Case Summary 

Black and Blue Sports Inc. manufactures two products: snowboards and skis. The factory overhead incurred is as follows:

Indirect labor                             507,000

Cutting department                    156,000

Finishing department                  192,000

Total                                         855,000

The activity base associated with the two production departments is direct labor hours. The indirect labor can be assigned to two different activities as follows:

Activity

Budgeted Activity Cost

Activity Base

Production control

237,000

Number of production runs

Materials handling

270,000

Number of moves

Total

507,000

The activity base usage quantities and units produced for the two products are shown below.

Number of Production Runs

Number of Moves

Direct Labor Hours- Cutting

Direct Labor Hours- Finishing

Units Produced

Snowboards

430

5,000

4,000

2,000

6,000

Skis

70

2,500

2,000

4,000

6,000

Total

500

7,500

6,000

6,000

12,000

Determine the factory overhead rates under the multiple production department rate method. Assume that indirect labor is associated with the production departments, so that the total factory overhead is 315,000 and 540,000 for the Cutting and Finishing departments, respectively. Next, determine the total and per unit factory overhead costs allocated to each product, using the multiple production department overhead rates that you calculated.

Case Analysis

Using the information above, determine the activity rates, assuming that the indirect labor is associated with activities rather than with the production departments. Determine the total and per unit cost assigned to each product under activity based costing.

Executive Decisions

The controller of Tri Con Global Systems Inc. devised a new costing system based on tracing the cost of activities to products. The controller was able to measure post-manufacturing activities, such as selling, promotional, and distribution activities, and allocate these activities to products in order to have a more complete view of the company's product costs. This effort produced better strategic information about the relative profitability of a product lines. In addition, the controller used the same product cost information for inventory valuation of the financial statements. Surprisingly, the controller discovered that the company's reported net income was larger under this scheme than under traditional costing approaches. Why was the income larger , and what is your opinion of the controller's action?