Exam 9: Activity-Based Costing

Any discrete task that an organization undertakes to make or deliver a product or service is known as a stage.

When applying activity-based costing, the first step would be to compute the cost driver rates.

Cooke Company manufactures two products, Product F and Product G. The company expects to produce and sell 1,400 units of Product F and 1,800 units of Product G during the current year. The company uses activity-based costing to compute unit product costs for external reports. Below are current year data for the company's three activity cost pools: Total Activity Activity Cost Pool Total Cost Product F Product G Total Machine setups \ 10,800 80 setups 100 setups 180 setups Purchase orders \ 77,520 510 orders 1,010 orders 1,520 orders General factory \ 75,920 2,240 hours 3,600 hours 5,840 hours Required: Using the activity-based costing approach, determine the overhead cost per unit for each product.

Explain how activity-based costing provides a more detailed measure of costs than do plantwide or department allocation methods.

Using the department allocation method, a company establishes a separate overhead allocation rate for each department.

Sylvia's Housecleaning Service provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system: Activity Cost Pool Total Cost Total Activity Clearing \ 252,787 44,900 hours Job support 73,758 5,706 jobs Client support 7,668 270clients Other Not applicable Total The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. One particular client, the Layton family, requested 49 jobs during the year that required a total of 245 hours of housecleaning. For this service, the client was charged $2,500. Required: a. Compute the activity rates (i.e., cost per unit of activity) for the activity cost pools. Round all calculations to the nearest whole cent. b. Using the activity-based costing system, compute the customer margin for the Layton family. Round all calculations to the nearest whole cent. c. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to customers on the basis of cleaning hours. Compute the margin for the Layton family. Round all calculations to the nearest whole cent.

Swannee Company manufactures two products, Product A and Product B. The company estimated it would incur $160,790 in manufacturing overhead costs during the current period. Overhead currently is applied to the products on the basis of direct labor-hours. Data concerning the current period's operations appear below: Product A Product B Estimated volume 3,400 units 4,800 units Direct labor-hours per unit 1.40 hour 1.90 hours Direct materials cost per unit \ 7.40 \ 12.70 Direct labor cost per unit \ 14.00 \ 19.00 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 using an activity-based costing system to compute unit product costs for external financial reports instead of its traditional system based on direct labor-hours. The activity-based costing system would use three activity cost pools. Data relating to these activities for the current period are given below: Determine the unit product cost of each product for the current period using the activity-based costing approach.

Individual ABC systems do not vary because there is one ABC method.

Which of the following would be the most appropriate activity and cost drivers pairing for a Purchasing Department?

The basic difference between the department cost allocation method and activity-based costing (ABC) is the number of stages involved in allocating costs to products.

The Sparkle Cleaning Company provides housecleaning services to its clients. The company uses an activity-based costing system for its overhead costs. The company has provided the following data from its activity-based costing system: Activity Cost Pool Total Cost Total Activity Cleaning \ 101,574 16,200 hours Job support 32,724 1,80 jobs Client support 5,472 320 clients Other 100,000 Not applicable Total \ 239,770 The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. One particular client, the Smith family, requested 32 jobs during the year that required a total of 192 hours of housecleaning. For this service, the client was charged $2,200. Required: a. Using an activity-based costing system, compute the client margin for the Smith family. (Round all calculations to the nearest whole cent.) b. Assume the company decides instead to use a traditional costing system in which ALL costs are allocated to clients on the basis of cleaning hours. Compute the margin for the Smith family. (Round all calculations to the nearest whole cent.)

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 - Banc Corp. Trust estimates that it costs $500 to analyze and close a commercial loan. This amount has been included in the $396,000 of indirect costs. How much of the $396,000 indirect costs should be allocated to the Commercial Department, if Banc Corp. Trust uses a bankwide rate based on the number of loans processed?

Brenda's Big Burgers, a small hamburger restaurant and take-out drive-through, has identified the following resources that it uses in its business: Required: Fill in the chart below indicating the cost hierarchy that each of these costs is related:

When a department or product line is dropped, the common fixed costs which had been allocated to that department:

The plantwide allocation concept cannot be used in nonmanufacturing organizations.

Cost pools are used with: Plantwide Rates Department Rates A. Yes No B. No Yes C. No No D. Yes Yes

Conway Mountain Analysis offers agriculture and environmental assays. Its Soil Division performs testing on soil (S), as well as examines for the presence of pesticide residue (PR). Aggregated operating costs for the division are $1,050,000 based on a single overhead pool at a rate of $70 per testing hour. S testing uses 5,000 hours and PR uses 10,000 hours. The company is trying to determine whether a better costing structure can be established. The controller has identified the following costs: (1) Salaries and wages of laboratory techs are $600,000 based on 45% to S testing and 55% to PR testing. (2) Equipment related overhead like maintenance and utilities amounts to $150,000, with a cost driver of number of test hours. (3) Setup costs are $120,000 assigned based on 10,000 total setup hours. S testing requires 4,200 setup hours and PR testing requires 5,800 setup hours. (4) Costs of test designs amount to $180,000, based on the time required to design the tests. S testing requires 3,250 hours and P testing requires 1,750 hours. Required: Classify (1) through (4) above as volume-, batch-, product-, or facility-related costs.

Vargus Corporation has an activity-based costing system with three activity cost pools-Processing, Batch Setup, and Other. The company's overhead costs consist of equipment depreciation and indirect labor and are allocated to the cost pools in proportion to the activity cost pools' consumption of resources. Equipment depreciation totals $72,000 and indirect labor totals $8,000. Data concerning the distribution of resource consumption across activity cost pools appear below: Pracessing Batch Setup Other Equipment depreciation 0.20 0.40 0.40 Indirect labor 0.20 0.30 0.50 Required: Assign overhead costs to activity cost pools using activity-based costing.

Volume-based costing allocates indirect product costs based on the volume of output, using such allocation bases as direct labor hours, machine hours, or the amount of direct material used in the production process. Activity-based costing (ABC) has consistently shown that volume-based costing ________ the cost of high-volume products and ________ the cost of low-volume products. High-Volume Products Low-Volume Products A. Overstates Overstates B. Overstates Understates C. Understates Overstates D. Understates Understates

Safety Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products. Activity Cost Pools Activity Rate Batch Setup \ 62.52 per batch Processing customer orders \ 19.58 per customer order Assembling products \ 8.71 per assembly hour Data concerning two products appear below: Praduct C Praduct E Nurnber of batches 66 53 Nurnber of customer arders 46 31 Nurnber of assernbly hours 419 162 Required: How much overhead cost would be assigned to each of the products using the company's activity-based costing system?