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Washington, Inc. produces two different products (Product C and Product 2) using two different activities: Machining, which uses machine hours as an activity driver, and Inspection, which uses number of batches as an activity driver. The cost of Machining is $900,000, while the cost of Inspection is $41,080. The activity drivers are used as follows:

Product C Product 2 Total
Machine hours 1,100 3,800 4,900
Number of batches 49 17 66

What is the activity rate for Inspection?

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Answer:

  =  $622.42 per inspection

Explanation:

Under activity-based costing method, overheads are charged to units produced using cost drivers unlike the traditional absorption costing where overhead are charged using volume-related bases only like direct labour hours.

Cost drivers are the most important factors that cause a change in the amount of overhead incurred. For example, an appropriate cost driver for ordering cost would be the number of orders processed. And this would be used to charged overhead among the products responsible for the overheads

Overheads Activity rate = Activity overhead / number of cost drivers

Activity rate for inspection = inspection cost/ Total number of batches

    =  $41,080/ (47+17) batches

  =  $622.42 per inspection

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