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Activity Based Cost Drivers: EyeGuard Equipment Inc

Resource and Activity-Based Cost Drivers

EyeGuard Equipment Inc (EEI) manufactures protective eyewear for use in commercial and home applications. The product is also used by hunters, home woodworking hobbyists, and in other applications. The firms has two main product lines?the highest-quality product is called Safe-T, and a low-cost, value version is called Safe-V. Information on the factory conversion costs for EEI is as follows:

Factory Costs
Salaries $ 850,000
Supplies 150,000
Factory Expense 550,000
EEI uses ABC costing to determine the unit costs of its products. The firm uses resource consumption cost drivers based on an estimate of the amount that each activity consumes, as shown below. EEI has four activities: job setup, assembly, inspecting and finishing, and packaging.

Setup Assembly Inspect & Finishing Packaging
Salaries 15% 55% 20% 10% 100%
Supplies 20% 60% 20% 100%
Factory Expense 80% 20% 100%

The activity cost drivers for the two products are summarized below. Additionally, direct material of $3.50 and $6 is required for the Safe-V and Safe-T products, respectively.

Activities Activity Driver
Setup Batch
Assembly Units
Inspect and Finishing Hours
Packaging Hours
Safe-V Safe-T
Batches 250 600
Units 60,000 72,000
Finishing hours, per unit 0.2 0.3
Packaging hours, per unit 0.1 0.15
Materials per unit $ 3.50 $ 6.00

Determine the amount of the cost pool for each of the four activities.
Determine the activity-based rates for assigning factory costs to the two products.
Determine the activity-based total cost for each of the products.
What is the strategic role of the information obtained in part 3?

Solution Summary

The solution determines the activity based cost drivers for EyeGuard Equipment Inc. The strategic role of the information is determined.