Fajar Plantation Pty, Ltd continued to grow during 2022. The manager decided to add detergents to its existing range of soap and candles. Ms. Zahra, expressed concern regarding the accuracy of the product costing system now that the diversity of output has increased. To further understand the costs. Ms. Zahra undertook an activity analysis of indirect costs. Her findings were as follows.

Activity	Cost	Cost driver
Receipt of material	$ 22,500	Material receipts
Machining	127,500	Machine hours
Deliveries	22,500	Number of deliveries
Machine set-ups	45,000	Machine set-ups
Engineering	15,000	Engineering advice slips
Packaging	37,500	Cartons packed

The products’ use of each cost driver was estimated to be as follows.

Soaps	Candles	Detergents
Material receipt	700	100	200
Machine hours	100,000	70,000	30,000
Number of deliveries	1,100	300	100
Machine set-ups	1,500	1,100	400
Engineering advice slips	50	20	30
Cartons packed	2,600	900	500

Required:

a.            What do you know about activity cost and why a company should consider using activity-based costing to determine the rates for each of its activity cost?

b.            Compute the activity cost rate for each activity? Please give your explanation!

c.             What are the important considerations so that a cost can be classified into direct product costs and indirect product costs? Please explain!

d.            Calculate the indirect product cost based on the activity analysis? Please give your explanation!

e.            Calculate the total cost of production for detergent and explain the result!

Answer rating: 100% (QA)

a Activity cost is the total cost that can be traced to a specific activity like purchasing machine setting up shipping etc The advantage of determini... View the full answer