Activity Rate Calculation And ABC Cost Hierarchy Categories

Question A: Calculation of Activity Rates

The calculation of the activity rate is depicted with dividing the overhead costs with the respective cost drivers. The overhead costs are computed with sum of the cost incurred for the individual activities (Zeng et al., 2014).

The computation of the activity rate for the respective activities before the new tool was introduced are seen with the activity rate of $ 27963 for product design, $ 18.6 for warehousing, $ 2.6 for cutting and $ 2.4 for sewing. For instance, the activity rate for the warehousing is computed by computing the total cost of the warehousing and dividing it by number of batches ($170562/9170 = $ 18.6).

Question a:
Computation of Activity Rate for Each Activity Pool: Save Time On Research and Writing Hire a Pro to Write You a 100% Plagiarism-Free Paper. Get My Paper
Particulars	Product Design	Warehousing	Cutting	Sewing
Indirect Labour	$40,000	$40,000	$7,500	$15,000
Depreciation		$7,396		$34,696
Indirect Material	$37,512	$110,869	$135,861	$101,064
Utilities				$41,330
Other	$6,377	$12,297	$3,747	$14,730
Total	$83,889	$170,562	$147,108	$206,820
Nos. of Product Lines	3
Nos. of Batches		9170
Nos. of Cuts			56580
Direct Labour Hours				86175
Activity Rate	$27,963	$18.60	$2.60	$2.40

The cost hierarchies under the ABC system is associated to the categorization as per the various types of the cost drivers. The ABC system commonly considers the cost hierarchies in four different level of segregation (Weygandt, Kimmel & Kieso, 2015). As discussed by Christopher, 2016 in general, the cost drivers are depicted to be different from the relationship of the indirect cost, product and service. The output unit level costs are seen to be associated to the activities performed on the individual unit of the service. The batch level cost is further depicted to be associated to the cost of the activities which are performed at the group of the units based on the services or the products rather than the individual units (Dale & Plunkett, 2017).

The above table shows the segregation of each activity using the ABC cost hierarchy categories. It needs to be also discerned that the classification of the cost consideration of the individual cost constraints are seen to be associated to the segregation of the data as per the cost activities, cost pools and cost drivers (Wang et al., 2014). The cost activities are depicted with the items such as Indirect Labour, Depreciation, Indirect Material, Utilities and Other activities. The cost pools are classified into categories relating to Product Design, Warehousing, Cutting and Sewing. The cost drivers for the study are further seen to be depicted in terms of the various types of the cost drivers which are seen to be considered as per Nos. of Product Lines, Nos. of Batches, Nos. of Cuts and Direct Labour Hours (Christopher, 2016).

	Cost Pools
Activities	Product Design	Warehousing	Cutting	Sewing
Indirect Labour	$40,000	$40,000	$7,500	$15,000
Depreciation		$7,396		$34,696
Indirect Material	$37,512	$110,869	$135,861	$101,064
Utilities				$41,330
Other	$6,377	$12,297	$3,747	$14,730
Total	$83,889	$170,562	$147,108	$206,820
Cost Drivers
Nos. of Product Lines	3
Nos. of Batches		9170
Nos. of Cuts			56580
Direct Labour Hours				86175
Activity Rate	$27,963	$18.60	$2.60	$2.40

The total annual cost of $ 161190 is considered to be associated to the present schedule of total cost under the activity pool before the purchasing of the new tool. The total annual cost has included Indirect Labour $7,500, Indirect Material $135,861 and Other cost $3,747. It has  also included the Additional Operating Cost of $14,082 (Mukhopadhyay, 2015).

Question c:
Schedule of Total Annual Cost of Cutting Dept.:
Particulars	Amount
Indirect Labour	$7,500
Indirect Material	$135,861
Other	$3,747
Additional Operating Cost	$14,082
Total Annual Cost	$161,190

Question B: Classification using ABC Cost Hierarchy Categories

The consideration of cost per cut (assuming the cutting tools has been purchased) is identified with $ 2.85. This was calculated by dividing the revised annual cost with the total number of cuts. The revised annual cost is the same as the total annual cost of $ 161190 which is considered to be associated to the present schedule of total cost under the activity pool before the purchasing of the new tool. Similarly, the predetermined rate for the total number of cuts has been seen as 56580.

Question d:
Computation of Cost per Cut:
Particulars	Amount
Revised Annual Cost	$161,190
Nos. of Cuts	56580
Cost per Cuts	$2.85

The identification of any other activity rates that will be affected by the purchase of the new cutting tool can be seen with the effect on the sewing. This is mainly due to the fact that sewing process is followed after cutting. Therefore, the activity of the sewing is seen to be directly associated to the rate of the activity of performing cutting. The faster is the rate of cutting, sewing process will be also faster and vice versa. The important consideration of the activity for the cutting is further seen to be associated to the Indirect Labour, Depreciation, Indirect Material, Utilities and Other expenses (Bennett & James, 2017). Therefore, the net impact of the various types of the changes pertaining in these activities will also impact significantly to the sewing. The effect of the consideration of any other activity is directly related to the to the changes in the amount of depreciation, indirect material, utilities and other materials (Dong, Liu & Lin, 2014).

The changes in the unit cost in sewing has been already explained with the main consideration of the sewing process followed by cutting activity. The activity of the sewing is seen to be directly associated to the rate of the activity of performing cutting (Mossialos et al., 2016). The faster is the rate of cutting, sewing process will be also faster and vice versa. However, the significant nature of the changes in the other factors needs to be discerned with the different types of the other factors which are seen to be taken into account with product design, warehousing and sewing. In case a new cutting is introduced the company will be able to implement a new product line in the product design phase (Cooper, 2017). In addition to this, the warehousing will be able to implement new activities in the product design. The warehousing factors may be affected as the new cutting tools may increasing the overall capacity of the production. This will lead to creating the provision for a higher scope of the storage facility. Therefore, introducing a new cutting tool will not only affect the sewing activity but also product design and warehousing (Grande et al., 2015).

Question C: Schedule of Total Annual Cost

It needs to be discerned that the present activity rate for the cutting is $ 2.6, which is significantly low. The company may seek to introduce a new cutting tool which will be conducive for the increasing the overall efficiency as well positively impact manufacturing process. If the management agrees to this decision then the activity of the sewing is seen to be directly associated to the rate of the activity of performing cutting. Therefore, with a slight increase in the activity rate for the cutting  it will be able to sew with more efficiency. Some of the other benefits from introducing a new cutting tool is seen with product design, warehousing and sewing. In case a new cutting is introduced the company will be able to implement a new product line in the product design phase. The warehousing activity will be able to bring new activities in the product design. The warehousing factors may be affected as the new cutting tools may increasing the overall capacity of the production. This will lead to creating the provision for a higher scope of the storage facility. Therefore, it is recommended for the company to proceed with the introduction of a new tool for cutting.

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