Exam 9: Activity-Based Costing

Last year, Jasmine Taylor opened a gift store in a busy shopping center. She spent a lot on advertising and attracted many customers into the store, but very few customers made purchases and sales were declining. Jasmine paid attention to questions and requests made by customers and determined that they often requested items that were within the scope of her business but that she did not carry. When she offered to order items for her customers, delivery was usually too late and, again, sales were lost. What measures should Jasmine take to improve her business?

Mission Company is preparing its annual profit plan. As part of its analysis of the profitability of individual products, the controller estimates the amount of overhead that should be allocated to the individual product lines from the information provided below. (CMA based) Wall Mirrors Specialty Windows Units Produced 40 20 Material moves per product line 5 15 Direct labor hours per product line 200 300 Budgeted material handling costs: \ 50,000 - Under a traditional costing system that allocates overhead on the basis of direct labor hours, the materials handling costs allocated to one unit of Specialty Windows would be:

Upton Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Long and Short, about which it has provided the following data: Long Short Direct materials per unit \ 14.20 \ 48.30 Direct labor per unit \ 16.80 \ 50.40 Direct labor-hours per unit 0.80 2.40 Annual production 45,000 10,000 The company's estimated total manufacturing overhead for the year is $3,170,400 and the company's estimated total direct labor-hours for the year is 60,000. The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below: Estimated Overhead Activities and Activity Measures Cost Direct labor support (DLHs) \ 1,740,000 Setting up machines (setups) 422,400 Part administration (part types) 1,008,000 Total \3 ,170,400 Expected Activity Long Short Total DLHs 36,000 24,000 60,000 Setups 1,140 1,500 2,640 Part types 900 2,460 3,360 - The unit product cost of Product Long under the company's traditional costing system is closest to:

Merkel Industries has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Large and Small, about which it has provided the following data: Large Small Direct materials per unit \ 17.80 \ 55.40 Direct labor per unit \ 16.10 \ 55.20 Direct labor-hours per unit 0.70 2.40 Annual production 30,000 15,000 The company's estimated total manufacturing overhead for the year is $1,793,790 and the company's estimated total direct labor-hours for the year is 57,000. The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below: Activities and Activity Meas.ires Estirnated Overhead Cost Supporting direct labor (DLHs) 285,000 Setting up machines (setups) 437,190 Parts adrinistration (part types) Total Activities Large Small Total Supporting direct labor 21,000 36,000 57,000 Setting up machines 798 2,565 3,363 Parts adrninistration 1,539 1,140 2,679 Required: a. Determine the unit product cost of each of the company's two products under the traditional costing system. b. Determine the unit product cost of each of the company's two products under activity-based costing system.

Sarno Corporation has an activity-based costing system with three activity cost pools-Processing, Batch Setup, and Other. Costs in the Processing cost pool are assigned to products based on machine-hours (MHs) and costs in the Batch Setup cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. Data concerning the company's two products appear below: Activity Cost Pools Processing \ 3,000 Batch Setup \ 9,800 Other \ 9,200 MHs Batches Product \#1 5,800 700 Product \#2 4,200 300 Total 10,000 1,000 Product\#1 Product \#2 Sales \ 45,300 \ 48,400 Direct materials \ 19,600 \ 16,900 Direct labor \ 15,900 \ 24,200 Required: a. Calculate activity rates for each activity cost pool using activity-based costing. b. Determine the amount of overhead cost that would be assigned to each product using activity-based costing. c. Determine the product margins for each product using activity-based costing.

Farris Corporation's activity-based costing system has three activity cost pools-Machining, Batch Setup, and Other. The company's overhead costs have already been allocated to these cost pools as follows: Machining \ 15,200 Batch Setup 44,800 Other 16,000 Costs in the Machining cost pool are assigned to products based on machine-hours (MHs) and costs in the Batch Setup cost pool are assigned to products based on the number of batches. Costs in the Other cost pool are not assigned to products. The following table shows the machine-hours and number of batches associated with each of the company's two products: MHs Batehes Product Sea 2,000 800 Product Air 8,000 200 Total 10,000 1,000 Additional data concerning the company's products appears below: Product Sea Product Air Sales \ 220,700 \ 165,500 Direct materials 78,600 83,100 Direct labor \8 9,600 58,000 Required: a. Calculate activity rates for each activity cost pool using activity-based costing. b. Determine the amount of overhead cost that would be assigned to each product using activity-based costing. c. Determine the product margins for each product using activity-based costing.

Activity-based costing is based on the concept that products produce activities and activities produce resources.

The classification of cost drivers into general levels of activity, volume, batch, product, and so on is known as:

Air Dream Products has contracted with you to analyze and update its costing and pricing practices. The company's product line has changed over time from general air conditioning units to customizable mini-split units. Although some large orders are received, the majority of business is now generated from products designed and produced in small lots in order to meet specific detailed environmental and technical standards. The company has experienced increased overhead growth, including costs in customer service, production scheduling, inventory control and laboratory work. Overhead has doubled since the shift in product lines and management believes that the larger orders are being penalized, while smaller orders are receiving favorable cost and selling price treatment. Required: 1. Why would the shift in product lines have caused such major increases in overhead? 2. Is it possible that management is correct in its belief about the costs of the large and small orders and, if so, why? 3. Write a memo to management suggesting how it might change the cost accounting system to reflect the changes in the business.

When overhead is applied based on the volume of output, high-volume products tend to "subsidize" low-volume products.

Chang Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labor-hours (DLHs). The company has two products, Plain and Fancy, about which it has provided the following data: Plain Fancy Direct materials per unit \ 24.50 \5 9.30 Direct labor per unit \ 5.00 \2 5.00 Direct labor-hours per unit 0.20 1.00 Annual production 45,000 15,000 The company's estimated total manufacturing overhead for the year is $985,440 and the company's estimated total direct labor-hours for the year is 24,000. The company is considering using a variation of activity-based costing to determine its unit product costs for external reports. Data for this proposed activity-based costing system appear below: Estimated Overhead Activities and Activity Measures Cost Supporting direct labor (DLHs) \ 384,000 Setting up machines (setups) 255,840 Parts administration (part types) 345,600 Total \9 85,440 Expected Activity Plain Fancy Total DLuHs 9,000 15,000 24,000 Setups 1,032 936 1,968 Part types 624 240 864 - The manufacturing overhead that would be applied to a unit of Plain under the company's traditional costing system is closest to:

Which of the following statements is true?

Lamar Company manufactures two products, Product K9 and Product L43. Product L43 is of fairly recent origin, having been developed as an attempt to enter a market closely related to that of Product K9. Product L43 is the more complex of the two products, requiring 2.0 hours of direct labor time per unit to manufacture compared to 1.0 hour of direct labor time for Product K9. Product L43 is produced on an automated production line. Overhead currently is applied to the products on the basis of direct labor-hours. The company estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Product L43 and 40,000 units of Product K9 during the current year. Unit costs for materials and labor are: Product K9 Product I43 Direct material \ 11 \ 24 Direct labor 6 12 Required: a. Compute the predetermined overhead rate under the current method and determine the unit product cost of each product for the current year. b. The company is considering the use of activity-based costing as an alternative to its traditional costing method for manufacturing overhead. Data relating to the company's activity cost pools for the current year are given below: Total Activity Product Product Activity Cost Pool Total Cost K9 L43 Total Machine setups required \ 204,000 800 1,600 2,400 Purchase orders issued 43,500 500 100 600 Machine-hours required 105,000 7,000 10,500 17,500 Maintenance requests issued 650 850 1,500 Using the data above, determine the unit product cost of each product for the current year. c. What items of overhead cost make Product L43 so costly to produce according to the activity-based costing system? What influence might the activity-based costing data have on management's opinions regarding the profitability of Product L43?

Miracle Consulting Corporation has its headquarters in Chicago and operates from three branch offices in Portland, Dallas, and Miami. Two of the company's activity cost pools are General Service and Research Service. These costs are allocated to the three branch offices using an activity-based costing system. Information for next year follows: Activity Cost Pool Activity Measure Estirnated Cost General service \% of time devoted to branch \ 700,000 Research service Computer time \ 140,000 Estimated branch data for next year is as follows: \% of time Computer time Portland 30\% 200,000 minutes Dallas 60\% 150,000 minutes Miami 10\% 50,000 minutes How much of the headquarters cost allocation should the Dallas office expect to receive next year?

Which of the following statements is true regarding activity-based costing in administration?

It is possible to apply activity-based costing (ABC) to segments of an organization without applying it to the entire organization.

Required: For each of the following costs in manufacturing companies, identify a cost driver and explain why it is appropriate. Manufacturing Costs Driver and why appropriate A. Equipment maintenance B. Building utilities C. Computer operations D. Quality control E. Material handling F. Material storage G. Factory depreciation H. Set up costs I. Engineering changes J. Advertising expense

Banc Corp. Trust is considering either a bankwide overhead rate or department overhead rates to allocate $396,000 of indirect costs. The bankwide rate could be based on either direct labor hours (DLH) or the number of loans processed. The departmental rates would be based on direct labor hours for Consumer Loans and a dual rate based on direct labor hours and the number of loans processed for Commercial Loans. The following information was gathered for the upcoming period: Department DLH Loans Processed Direct Costs Consumer 14,000 700 \ 280,000 Commercial 8,000 300 \ 180,000 - If Banc Corp. Trust uses a bankwide rate based on the number of loans processed, what would be the total costs for the Commercial Department?

Using direct labor costs to allocate overhead costs in an activity-based costing (ABC) system will encourage management to reduce labor costs.

Which of the following is not a step involved in activity-based costing?