Exam 9: Activity- Based Costing

Carol is the controller for Stormy Corp., a company that manufactures lightweight jackets. Their most popular product is currently a storm cloud patterned rain jacket. Carol would like management to consider implementing Activity-Based Costing (ABC) so that they can better account for the costs associated with this rain jacket. She has gathered the following information pertaining to the rain jacket: Allocate Manufacturing Overhead (MOH) costs to the storm cloud patterned rain jacket using the activity-based cost drivers above (If required, round calculations to two decimal places.) The actual usage of the drivers is as follows: 1,480 supervisor hours 13,600 machine hours 2,850 cleaning hours

Sunflower, Inc. is a service-based business that provides landscaping architecture services to their clients. Management has been investigating whether a change to Activity-Based Costing (ABC) would benefit the company and help them achieve their goal of having the costs in their bids more closely mirror the actual costs while maximizing their profit. Currently, Sunflower bills at a flat rate of $9 per square foot of yard prep and had been adding a 15% markup to their bids. After analyzing their key tasks, they are going to use ABC for an upcoming customer bid: Sunflower would like to increase their markup to 18% for all jobs using ABC. What would Sunflower's difference in bid price be if they chose to utilize ABC?

Curtis owns Mayflower Construction, a company that specializes in the design and construction of what they have promoted as a backyard oasis. Curtis is putting together an informational packet to distribute to potential clients that will include examples of projects and suggested pricing. The first project in the packet will be backyard oasis consisting of a large pergola and seating. Curtis would like to upgrade Mayflower's costing to be in line with Activity-Based Costing (ABC) and has put together the following information about the first example project: Curtis would like to add a 19% markup to the total cost of the project. This would be a big transition from his current method of billing at a flat rate of $194 per linear square foot. Should Curtis switch to the new ABC method?

Rosebud Inc. is a retail company that specializes in the sale of wooden sleds. The accountants for the company are in the process of identifying appropriate cost drivers for the organization. Their current focus is upon ensuring that each activity and its related cost driver are placed at the appropriate level of the cost hierarchy. The most recent production run resulted in the creation of 450 wooden sleds and tallied the following totals: 3,000 square feet; 1,420 supervisor hours; and 1,997 inspection hours. How much facility-level cost should be allocated to the production department of Rosebud?

Lumins, Inc. is a manufacturer of fine quality lamps and currently offers two kinds: floor lamps and desk lamps. Each floor lamp needs 2 direct labor hours and 3 pounds of direct materials while each desk lamp needs 1.5 direct labor hours and 1.75 pounds of direct materials. They currently utilize a traditional costing system, but management has recently established an exploratory committee to investigate whether a switch to Activity-Based Costing (ABC) might be beneficial. Their key activities are as follows: Machining, $22.78 per machining hour; Factory Utilities, $3.77 per square foot; and Supervisor Wages, $13.42 per hour. Lumins has gathered the following information about production and related costs: Under a traditional costing system, Manufacturing Overhead (MOH) is estimated at 90% of the direct labor costs. What is the per-unit cost for desk lamps under a traditional costing system? What is the per-unit cost for desk lamps under ABC? (Do not round intermediate calculations.)

Melissa is the controller for Barker Inc., a factory that creates unique dog chew toys. Until now, Barker has been using a single plant-wide rate of $10.75 per direct labor hour to allocate Manufacturing Overhead (MOH) costs. Melissa has been debating a switch to activity-based costing and has derived the following activity-based rates: $18)00 per machine hour $11)00 per direct labor hour $6)00 per inspection hour A recent production run used 65 machine hours, 186 direct labor hours, and 13 inspection hours. How much MOH would be allocated using the newly derived activity-based rates?

Monarch Inc. is a company that creates and distributes butterfly-themed home décor. You are attempting to calculate total product costs for Monarch by using traditional costing. They have the following costs: Direct Materials (DM) of Resin, $12,000; DM of Metal Backing, $9,000; Paint, $6,000; DM of Adhesive, $10,000; Cardboard for Packaging, $3,000; Assembly Line Wages, $55,750; Marketing, $36,000; and Sales Commissions, $60,000. Their Manufacturing Overhead (MOH) will be 85% of their Direct Labor (DL) cost. What are their total product costs?

Santana is a staff accountant for Tapestry, a factory that manufactures decorative wall hangings. Tapestry is gearing up to have their busiest year yet, and they anticipate the production of 147,800 units. Santana has been analyzing some cost data and is going to recommend to management that they switch from a traditional costing system to an Activity-Based Costing (ABC) system. Santana believes that management will benefit overall from having the costing allocated by activity rather than a single cost driver. Tapestry has the following budgeted costs: Direct Materials (DM), $283,706.00; and Direct Labor (DL), $186,540.00. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Materials Sorting: $88,700 (10,000 yards of fabric) Setups: $56,400 (7,600 setups) Supervisor Wages: $103,540 (8,430 hours) The actual usage of resources this year includes 9,680 yards of fabric, 7,400 setups, and 8,133 supervisor hours. (If required, round calculations to two decimal places.) a. How much MOH is allocated for the year based upon the ABC rates? b. How much is the total product cost for the wall hanging units produced this year? c. What is the total cost per unit for each wall hanging?

If a company uses traditional costing and only one cost driver, what would be the correct order with which costs are considered in calculating overall product cost?

Tara is a contractor, and she owns a small home renovation company that specializes in kitchen renovations. Tara fears she has been underbidding her projects, and that translates into lost profits that could help sustain her through slow periods. She is putting together an estimate for a potential client and has determined the following activities: Previously, Tara was billing at a flat rate of $13 per square foot of the demo space with no additional markup. Tara would like to add a 20% markup to the cost to arrive at the final bid price. Using Activity-Based Costing (ABC), what is the final bid price for her potential customer? (If required, round calculations to two decimal places.)

Leslie is the new controller for Toasties, a coffee bean roaster, and she has decided to introduce some changes that she believes will assist management in making more informed cost decisions. At her previous job, Leslie implemented activity-based costing, and the management was thrilled to be able to better allocate their Manufacturing Overhead (MOH) costs to their products. Leslie is optimistic that Toasties will benefit in the same manner and has identified the following key activities: Machining $48,400 (8,000 machine hours) Cleaning/Maintenance $36,700 (6,850 cleaning/maintenance hours) Roaster supervisor wages $84,330 (16,800 supervisor hours) Leslie anticipates that Toasties will roast 12,400 pounds of light beans and 18,990 pounds of dark beans. The light beans will use the following: Machining, 3,200 machine hours; Cleaning/Maintenance, 2,980 cleaning/maintenance hours; and 7,100 Roaster Supervisor Hours. The dark beans will use the following: Machining, 4,800 machine hours; Cleaning/Maintenance, 3,870 cleaning/maintenance hours, and 9,700 Roaster Supervisor Hours. What is the total amount of MOH costs that will be allocated to the light beans based upon ABC? (If required, round calculations to two decimal places.)

In order to operate its customer support activity, Lucky's Amusement Park incurred $325,000 in annual costs (spread evenly amongst the four quarters of the year). Due to the large number of visitors to the park each year, Lucky has been debating whether or not they can afford to bring on additional customer support staff members. While having an annual capacity of 525,000 minutes, Lucky is going to be utilizing Time-Driven Activity-Based Costing (TDABC). They have identified the following as their key activities within the customer support function: ticket sales, park admittance, assisting customers once they enter the park, and processing customer refunds. Management has compiled information pertaining to the first two quarters of the year: Using TDABC, what are the total costs allocated to quarter two? Also, what was the over- or underallocation of costs? (If required, round calculations to two decimal places.)

Bard Inc. is currently comparing a potential implementation of Activity-Based Costing (ABC) with their current use of traditional costing and comparing the results. Bard creates two products: Candy Bars, 60,000 units; and lollipops, 82,000 units. Under ABC, Manufacturing Overhead (MOH) is allocated at $43,877.44 to candy bars and $32,781.90 to lollipops. Under traditional costing, MOH is allocated at $46,707.87 to candy bars and $29,915.47 to lollipops. Which of the following statements is correct?

Candy is having a meeting with Sharon, a member of the management team at the retail company where they are both employed. They are currently discussing the way that the purchasing department's costs are being handled. Candy believes that these costs should be considered a unit-level cost and allocated based upon the number of units needed as that dictates what the department purchases. Sharon believes that the costs should be allocated on a batch level based on the number of purchase orders used for each area. Candy has compiled some data on both cost drivers and the total costs for the purchasing department. Their one product line requires 62 purchase orders this year in order to purchase 27,400 units. (If required, round calculations to two decimal places.) a. How much of the purchasing cost would be allocated under Candy's unit-level assumption? b. How much of the purchasing cost would be allocated under Sharon's batch-level assumption? c. Which method would you recommend that Candy and Sharon use for this retail company?

Sharon has decided to try and calculate her Manufacturing Overhead (MOH) allocation with a departmental rate rather than using a plant-wide rate. She works for Seashell, Inc., a factory that produces seashell-themed keychains. She is looking at the costs derived from the production department and the department's total budgeted costs include: Factory Utilities, $66,000; Factory Supervisor Salaries, $100,000; Assembly Line Worker Wages, $284,000; Maintenance Wages, $32,000; Seashells, $15,000; Metal for Keychains, $7,000; and Factory Depreciation, $54,000. What is the budgeted departmental MOH rate based on Direct Labor (DL) cost?

Roger has just been hired as an accountant and is in the process of performing some cost accounting calculations. The factory where he works produces tennis balls and uses a plant-wide cost pool under their simple costing system. The factory's total Manufacturing Overhead (MOH) costs are budgeted for: rent for the factory, $72,000; factory utilities, $40,000; quality control salaries, $52,000; and janitorial salaries, $36,000 in addition to assembly line workers' wages of $246,000, tennis ball coating costs of $10,000, and tennis ball core costs of $5,000. What is the budgeted MOH rate using one plant-wide pool based on Direct Labor (DL) cost?

Pazzo's Pizza utilizes Activity-Based Costing (ABC) to account for its Manufacturing Overhead (MOH) costs, and they have determined that they have three key activities: Property tax ($88.77 per square foot), Floor supervisor wages ($18.00 per hour), and Cleaning ($8.98 per hour). Pazzo's Pizza anticipates that they will sell the following quantities of three different kinds of pizza: Cheese, 68,392 pizzas; Pepperoni, 49,708 pizzas; and Veggie, 26,909 pizzas. Each pizza will need to use the following resources: Assuming that their estimates are final, what is the total product cost for the cheese pizzas? (Do not round intermediate calculations.)

Fashion Express, Inc. is a clothing retail vendor that specializes in modern women's clothing. They incurred costs of $146,000 last year to facilitate their staff performing customer service and sales activities. These resources create a capacity of 210,000 minutes for Fashion Express within their customer service and sales activity per year. On average, servicing all customers requires the following transactions throughout the year: processing sales orders, 105,000 minutes; restocking merchandise, 44,500 minutes; cash register, 50,450 minutes; and issuing returns, 10,050 minutes. Using Time-Driven Activity-Based Costing (TDABC), how much cost will be allocated to the cash register transactions? (If required, round calculations to two decimal places.)

Yogi Inc. is a small company that produces yoga mats and assorted accessories. They have recently transitioned to Activity-Based Costing (ABC) and are in the process of creating a budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs which are divided into three key activities: During the year, Yogi used 4,000 setup hours; 12,600 machine hours; and 2,300 inspection hours. How much Production MOH will Yogi report for Product A, considering the actual usage of each of the three key activities? (Do not round the calculations.)

Sarah is an accountant for Flowy, Inc., a small factory that manufactures disposable hospital gowns and slippers. Previously, Flowy had been utilizing a traditional costing system to account for their budgeted Manufacturing Overhead (MOH) costs. After a few years, Sarah recommended that they opt for Activity-Based Costing (ABC) as that would afford them the opportunity to better account for their costs. She has determined that Flowy had three key activities to use for MOH budgeted costs: Materials sorting, garment inspection, and materials management wages. She has collected the following data: Materials sorting: $37,888 (3,678 sorting hours) Garment inspection: $55,986 (4,770 inspection hours) Materials management wages: $18,900 (13,000 management hours) If gowns used 2,000 sorting hours, then what amount of material sorting MOH costs will be allocated to slippers? (Do not round intermediate calculation.)