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Chapter 3

Q. 3.3

A tree nursery is considering a change of product mix in its inventory. The manager wants to estimate the product cost of different types of trees. There are no activities that lead to direct costs. Indirect costs are identified and estimated for the following activities: watering, repotting (transferring trees to larger pots), and administration. Total estimated annual costs for each activity, the cost driver for each activity, and the expected annual usage of each cost driver are:

Activity Estimated Costs Cost Driver Estimated Usage of Cost Driver
Watering $50,000 Number of trees 500,000
Repotting 100,000 Number of repots 200,000
Administration 75,000 N Number of different types of trees 500

a. What is the application rate for each of the activities?
b. Given the choice of cost driver, at what level is each activity: unit, batch, product ,or facility?
c. What are the estimated costs of 100 golden oaks, each of which requires one repotting each year?


Verified Solution

The application rate for each activity is calculated by dividing estimated costs of the activity by the estimated usage of its respective cost driver:

Activity Application Rate
Watering $50,000/500,000 $0.10/tree
Repotting $100,000/200,000 $0.50/repot
Administration $75,000/500 $150/type of tree

a. Both watering and repotting are unit-level activities, since their cost drivers vary with the number of units. Administration is treated as a product-level activity, because each product receives the same indirect costs.
b. The indirect costs traced to the 100 golden oaks are:

Golden Oak

Activity Application Rate Usage Costs
Watering $0.10/tree 100 $10
Repotting $0.50/repot 100 50
Administration $150/type of tree  1 150
Total annual indirect costs $210

The estimated cost per golden oak is $210/100 golden oak trees, or $2.10/tree.