Exam 11: Activity-Based Costing

Figure 11-5 Granite, SA., has identified the following overhead costs and cost drivers for next year: Overhead Item Expected Cost Cost Driver Expected Quantity Setup costs £100,000 Number of setups 500 Ordering costs 40,000 Number of orders 3,200 Maintenance 200,000 Machine hours 4,000 Power 20,000 Kilowatt hours 80,000 The following are two of the jobs completed during the year: Direct materials £1,500 £2,000 Direct labour £1,400 £2,400 Units completed 100 160 Direct labour hours 100 160 Number of setups 2 8 Number of orders 8 10 Machine hours 40 50 Kilowatt hours 60 100 The company's normal activity is 4,000 direct labour hours. -Refer to Figure 11-5. If Granite, SA., used activity-based cost drivers to allocate overhead costs, the total cost of Job 500 would be

Figure 11-2 Owens Ltd. produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering £1,000,000 Setups 900,000 Machining 2,000,000 Inspection 800,000 Providing space 250,000 Providing utilities 180,000 Activity drivers for each activity have been identified and their practical capacities listed: Machine hours 25,000 Setups 200 Engineering hours 5,000 Inspection hours 2,500 The costs of facility-level activities are assigned using machine hours. -Refer to Figure 11-2. What is(are) the facility-level activity(ies)?

Activity-based costing assigns costs to cost object by first

Lyons, SA., has identified the following overhead costs and activity drivers for next year: Overhead Item Expected Cost Activity Driver Expected Qty. Setup costs £150,000 Number of setups 1,200 Ordering costs 40,000 Number of orders 10,000 Maintenance 200,000 Machine hours 16,000 Power 20,000 Kilowatt hours 100,000 The following are two of the jobs completed during the year: Direct materials £2,250 £2,500 Direct labour 3,000 1,875 Units completed 375 300 Direct labour hours 90 110 Number of setups 6 8 Number of orders 8 15 Machine hours 180 150 Kilowatt hours 90 120 The company's normal activity is 20,000 direct labour hours. a.Determine the unit cost for each job using direct labour hours to apply overhead. b.Determine the unit cost for each job using the four activity drivers. (Round amounts to 2 decimal places.) c.Which method produces the more accurate cost assignment? Why?

An activity-based cost system

An example of a nonunit-level driver is

Figure 11-2 Owens Ltd. produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering £1,000,000 Setups 900,000 Machining 2,000,000 Inspection 800,000 Providing space 250,000 Providing utilities 180,000 Activity drivers for each activity have been identified and their practical capacities listed: Machine hours 25,000 Setups 200 Engineering hours 5,000 Inspection hours 2,500 The costs of facility-level activities are assigned using machine hours. -Refer to Figure 11-2. What is the cost pool rate for the product-level activities?

The overhead rates of the traditional-based approach to product costing use

Figure 11-3 Moss Ltd. has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries £75,000 Equipment 40,000 Supplies 10,000 Total £125,000 -Refer to Figure 11-3. What is the cost assigned to the designing tooling activity?

Hunter Company manufactures two products (XX and YY). The overhead costs have been divided into four cost pools that use the following activity drivers: Number of Number of Number oflabour Labour Product Orders Setups Transactions Hours XX 60 20 50 2,000 YY 20 80 70 500 Cost per pool £16,000 £13,000 £2,400 £20,000 a.Compute the allocation rates for each of the activity drivers listed. b.Allocate the overhead costs to Products XX and YY using activity-based costing. c.Compute the overhead rate using labour hours under the traditional functional-based costing system. d.Allocate the overhead costs to Products XX and YY using the traditional functional-based costing system overhead rate calculated in part (c).

In an activity-based cost system, what types of drivers are used to describe cost behaviour?

An example of a production or unit-level driver is

Figure 11-3 Moss Ltd. has the following activities: creating bills of materials (BOM), studying manufacturing capabilities, improving manufacturing processes, training employees, and designing tooling. The general ledger accounts reveal the following expenditures for manufacturing engineering: Salaries £75,000 Equipment 40,000 Supplies 10,000 Total £125,000 -Refer to Figure 11-3. What is the cost assigned to the creating BOMs activity?

Basing overhead allocation solely on volume

What is the initial step in implementing an activity-based costing system?

Figure 11-2 Owens Ltd. produces specially machined parts. The parts are produced in batches in one continuous manufacturing process. Each part is custom produced and requires special engineering design activity (based on customer specifications). Once the design is completed, the equipment can be set up for batch production. Once the batch is completed, a sample is taken and inspected to see if the parts are within the tolerances allowed. Thus, the manufacturing process has four activities: engineering, setups, machining, and inspecting. In addition, there is a sustaining process with two activities: providing utilities (plantwide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Engineering £1,000,000 Setups 900,000 Machining 2,000,000 Inspection 800,000 Providing space 250,000 Providing utilities 180,000 Activity drivers for each activity have been identified and their practical capacities listed: Machine hours 25,000 Setups 200 Engineering hours 5,000 Inspection hours 2,500 The costs of facility-level activities are assigned using machine hours. -Refer to Figure 11-2. What is(are) the unit-level activity(ies)?

Figure 11-1 Ubben Manufacturing uses an activity-based costing system. The company produces Model X and Model Y. Information relating to the two products is as follows: Model X Model Y Units produced 20,000 40,000 Machine hours 8,000 10,000 Direct labour hours 14,000 16,000 Engineering labour (hours) 1,000 1,400 Setups 40 60 The following costs are reported: Engineering £48,000 Setups 100,000 Machine-rel ated overhead 144,000 -Refer to Figure 11-1. Machine-related overhead would be classified as a

Figure 11-6 Peach, SA., has identified the following overhead costs and cost drivers for next year: Overhead Item Expected Cost \multicolumn 1 c Cost Driver Expected Quantity Setup costs £200,000 Number of setups 500 Ordering costs 80,000 Number of orders 3,200 Maintenance 400,000 Machine hours 4,000 Power 40,000 Kilowatt hours 80,000 The following are two of the jobs completed during the year: Direct materials £750 £2,000 Direct labour £700 £2,400 Units completed 100 160 Direct labour hours 50 80 Number of setups 1 4 Number of orders 4 5 Machine hours 20 25 Kilowatt hours 30 50 The company's normal activity is 4,000 direct labour hours. -Refer to Figure 11-6. If Peach, SA., used direct labour hours to assign overhead, the unit cost for Job 401 would be

Holbrook, SA., has identified the following overhead costs and cost drivers for next year: Overhead Item Expected Cost Cost Driver Expected Quantity Setup costs £960,000 Number of setups 4,800 Ordering costs 160,000 Number of orders 20,000 Maintenance 640,000 Machine hours 64,000 Power 80,000 Kilowatt hours 200,000 The following are two of the jobs completed during the year: Job 701 Job 702 Prime costs £25,00 £18,000 Units completed 650 500 Direct labour hours 180 220 Number of setups 12 15 Number of orders 16 30 Machine hours 360 300 Kilowatt hours 180 650 The company's normal activity is 40,000 direct labour hours. a.Determine the unit cost for each job using direct labour hours to apply overhead. b.Determine the unit cost for each job using the four cost drivers. (Round amounts to two decimal places.) c.Which method produces the more accurate cost assignment? Why?

The use of unit-based activity drivers to assign costs tends to