Exam 6: Cost Allocation and Activity-Based Costing

Cost allocation is the process of assigning direct and indirect costs to products.

Fifth Third Bank is a banking services company that offers several different types of checking accounts. The bank has recently adopted an activity-based costing system to assign costs to its checking accounts. The following data relate to the Mind Your Money checking accounts and the ABC cost pools: $\text { Annual number of accounts }=60,000 \text { accounts }$ Cost Pool Cost Cost Drivers Returned check costs \ 3,000,000 Number of returned checks Account reconciliation costs 60,000 Number of account reconciliation requests New account setup 650,000 Number of new accounts Archive requests 400,000 Number of archive requests Web site costs 195,000 Per account type Total checking account costs \4 ,305,000 $\text { Annual activity information related to cost drivers: }$ Cost Pool All Products Mind Your Monev Checking Returned checks 200,000 returned checks 18,000 Account reconciliation costs 3,000 reconciliation requests 420 New account setups 60,000 new accounts 15,000 Archive requests 100,000 archive requests 60,000 Web site costs 10 types of accounts 1 How much is the rate to be used to allocate account reconciliation cost to each Mind Your Money checking account?

The traditional approach to cost allocation

The advantage of allocating budgeted rather than actual service department costs is that

Fox Hunting Gear manufactures two products: camouflage jackets and camouflage hats. The company makes 50,000 jackets and 20,000 hats each year. Information for overhead costs and for the two products appears below. Estimated Total Activity Driver Overhead Cost Jackets Hats Setups \# of setups \ 200,000 500 setups 1,500 setups Ordering parts \# of parts 300,000 60,000 parts 40,000 parts Machining \# of machine hours 600,000 12,000 machine hrs. 6,000 machine hrs. Inspections \# of inspections 400,000 10,000 inspections 40,000 inspections Shipping \# of shipments 300,000 10,000 shipments 10,000 shipments Total overhead \1 ,800,000 Assume that all overhead is assigned to products using machine hours. How much overhead will be assigned to each jacket?

An example of a unit-level activity is the design of a particular product.

Ransall Auto Parts has two service departments-maintenance and personnel, and three production departments-fabrication, assembly, and packaging. Service costs are allocated to producing departments using the direct method. Information on overhead in each department and possible allocation bases appear below: Maintenance Personnel Eabrication Assembly Packaging Cost \ 90,000 \ 130,000 Machine hours 12,000 30,000 18,000 Employees 4 16 24 30 20 Using the most logical activity base, how much maintenance cost will be allocated to packaging?

Allocating actual service department costs allows the service departments to pass on the costs of inefficiencies to the production departments.

Hurst Productions uses activity-based costing. The company produces weekly and monthly magazines. The estimated costs and expected activity for each of the activity pools follow: Expected Activity Cost Pool Estimated Cost Weekly Monthly Total Pressing \ 24,600 600 400 1,000 Printing 6,250 400 100 500 Binding 9,000 800 1,200 2,000 How much are the total costs to be allocated to monthly magazines?

Terrel Gifts produces logo platters and cups bearing the name of the city in which the items will be sold to tourists. Indirect logo printing costs are allocated to platters and cups based on the amount of time spent on the logo machine. The company has budgeted logo costs of $4,224 per month and expects to spend 4,800 hours on the printing logos each month. Each platter uses 24 minutes and each cup spends 6 minutes on the logo machine. How much of the logo printing costs will be allocated to each platter?

Manufacturing overhead is allocated to products based on the number of machine hours required. In a year when 40,000 machine hours and 60,000 direct labor hours were anticipated, indirect costs were budgeted at $252,000. If production of wagons requires 9,000 machine hours and 10,800 direct labor hours, how much manufacturing overhead will be allocated to wagons?

Ernst & Gray, CPAs has three divisions: audit, tax, and business consulting. When the specifications for the new computer system were established, the audit division needed 50% of the capacity, the tax division required 30%, and business consulting required 20%. The fixed computer department costs are allocated based on computer needs. The variable costs of the computer department are allocated based on the minutes of computer time that each department uses. The computer division budget for fixed costs is $450,000, and the budget for variable costs is $145,600. The company anticipates using 520,000 minutes of computer time. If the audit division uses 250,000 minutes of computer time, what amount of variable costs will be allocated to the audit division (round your intermediate calculation to two decimal places)?

Hurst Productions uses activity-based costing. The company produces weekly and monthly magazines. The estimated costs and expected activity for each of the activity pools follow: Expected Activity Cost Pool Estimated Cost Weekly Monthly Total Pressing \ 24,600 600 400 1,000 Printing 6,250 400 100 500 Binding 9,000 800 1,200 2,000 How much pressing cost will be assigned to monthly magazines?

Rather Bedding makes two types of pillow-down and foam. It is currently implementing an activity-based costing system. In the past, all overhead had been applied on the basis of machine hours. The company produces 6,000 down pillows and 18,000 foam pillows per year. Cost Pool Driver and Level Estimated Costs Use of Driver by Down Pillows Use of Driver by Foam Pillows Equiument setup 360 setups \ 216,000 120 setups 240 setups Materials ordering 6,000 orders \ 60,000 2,400 orders 3,600 orders Quality control 2,000 inspections \ 36,000 800 inspections 1,200 inspections Machining 8,000 machine hours \8 6,000 4,200 machine hours 3,800 machine hours Using ABC, what is the cost per machine hour in the machining pool?

Which of the following is likely to occur when fewer overhead cost pools are used?

Activity-based management

VelCraft allocates costs from its payroll department and the maintenance department to its production departments using the direct method of allocation. Payroll department costs are allocated based on the number of employees in the department and maintenance department costs are allocated based on the number of square feet that the production department occupies within the factory. Information about the departments is presented below: Denartment Costs Number of Emplovees Number of Square Eeet Occupied Payroll \ 150,000 2 2,000 Maintenance \ 220,000 8 64,000 Molding 75 100,000 Finishing 50 60,000 Packaging 25 40,000 What amount of the payroll department costs will be allocated to the packaging department?

Sweet Cocoa produces chocolate syrup used by candy companies. Recently, the company has had excess capacity due to a foreign supplier entering its market. Sweet Cocoa is currently bidding on a potential order from Kilwin's Candy for 5,000 cases of syrup. The estimated cost of each case is $27.50, as follows: direct material, $10; direct labor, $5; and manufacturing overhead, $12.50. The overhead rate of $2.50 per direct labor dollar is based on estimated annual overhead of $1,500,000 and estimated direct labor cost of $600,000, composed 40% of variable costs and 60% of fixed costs. The largest fixed cost relates to depreciation of plant and equipment. Should Sweet Cocoa bid on the Kilwin's Candy business at $21 per case?

Excellence Pastries produces baked goods. Utility costs are allocated to the products based on the baking time required for the product. Utility costs of $291,500 are budgeted in a period when 550,000 total minutes of baking time and 100,000 minutes of cooling time are anticipated. If a batch of rolls bakes for 45 minutes, and then cools for 15 minutes, what amount of utility cost will be allocated to each batch of rolls?

Sanford Tracking has two production plants. Recently, the company conducted an ABM study to determine the cost of activities involved in processing orders for parts at each of the plants. How might an operations manager use this information to manage the cost of processing orders?