Exam 9: Activity- Based Costing

Benjamin is the controller for the Dual Star call center, a small customer service company. Benjamin has been looking into their costing practices and questions whether traditional costing should continue to be used. He is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Benjamin has several customer service activities including: service calls, job proposal follow-up, and "thank you" calls. Benjamin has compiled the following information: Supporting these activities cost Dual Star $99,700 last year, and they had 19,500 minutes within their capacity. How much total cost would be allocated to the key activities? (If required, round calculations to two decimal places.)

Primrose Inc. manufactures high quality hair care products. Their most recent success has been a rose-scented conditioner for fine hair to accompany their best-selling rose-scented shampoo. This has been a great year for Primrose with sales of shampoo reaching 105,600 bottles and sales of their new conditioner reaching 86,420 bottles. Their controller, Jeff, has compiled the following information pertaining to their materials and labor usage for both the shampoo and conditioner: Primrose has chosen to allocate their Manufacturing Overhead (MOH) costs by using a single plant-wide MOH rate that is based upon Total Direct Labor (DL) costs. Primrose has been looking into ways that it can improve how it allocates and tracks costs. Jeff has suggested the use of Activity-Based Costing (ABC) and has identified the following common key activities, associated cost information, and quantity of each driver: Jeff would like to assist management by their next meeting. While keeping all of his data and compilations in mind, please provide some insight into the following questions. (If required, round calculations to two decimal places.) a. What is Primrose's budgeted manufacturing overhead rate in percentage form using one plant-wide pool? What are Primrose's activity-based rates using the identified key activities and respective cost drivers? (Round percentage figure to two decimal places.) b. Allocate manufacturing overhead costs to the rose-scented shampoo using the activity-based rates calculated in part (a), and present one total number, and do the same for the rose-scented conditioner. c. What are the total costs per unit for the rose-scented shampoo using both costing methods? d. What are the total costs per unit for the rose-scented conditioner using both costing methods? e. Why are the allocated MOH costs different between using a single plant-wide rate and using ABC? How might these differences impact Primrose's costing decisions in the future? Which method do you think Jeff will encourage Primrose to use?

After a company has successfully determined their activity-based rate, what steps must be taken to allocate Manufacturing Overhead (MOH) for an activity?

Alice is a new cost accountant working at a local factory in her hometown. She has been given the task of ensuring that costs for the company have been put into the correct cost hierarchies. She is currently evaluating a list and searching for batch-level costs. Which of the following is comprised of costs that would be included in her list of batch-level costs?

Tiny Corp. has provided the following information about its budgeted Manufacturing Overhead (MOH) costs. They also reported Direct Labor (DL) of $126,780 and Direct Materials (DM) of $78,699. They have broken the MOH costs into three activities: What is Tiny's plant-wide MOH rate if allocations are based on machine hours?

When using Activity-Based Costing (ABC) a manufacturing business will have to differentiate between Manufacturing Overhead (MOH) and nonmanufacturing period costs. Which of the following would be considered a nonmanufacturing period cost at the facility-level?

David owns a small boutique that sells products created by local vendors and artisans. He would very much like to update his store and will be hiring a contractor to complete the work. The contractor has informed him that the project will entail the following activities: Store design, 15 hours at $137 per hour; Carpet installation, 1,250 square feet at $10.80 per square foot; Fixture construction, $112 per piece with a total of 22 pieces; and SG&A expenses, 20 hours at $40.75 per hour. This estimate will also include a 26% additional markup based on the total of the estimated job costs for the entire project. A competing bid has been returned with a flat rate of $18.50 per square foot of carpet installation that would cover the whole project. Using Activity-Based Costing (ABC), what is the final bid price for the first bid?

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 80 machine hours, 240 direct labor hours, and 10 inspection hours. How much MOH would be allocated using the newly derived activity-based rates?

Stevens Services is a call center that specializes in several customer- and order-related activities. They are in the process of implementing Time-Driven Activity-Based Costing (TDABC) and have identified the following pertinent information: They incurred $155,000 last year to operate the aforementioned activities. Assume that employees handled the following number of calls during the year: Initial Orders, 23,400 calls; Service Requests, 11,480 calls; and Customer Complaints, 9,872 calls. How much total cost would be allocated to the key activities?

What industries are capable of utilizing activity-based costing, and in what manner would they do so? What are some additional non-manufacturing activity cost pools and associated cost drivers?

Paisley Corp. is a clothing company that produces blouses and pencil skirts that it sells online. Paisley has implemented Activity-Based Costing (ABC) and is in the process of compiling a budget for the coming year. Their Manufacturing Overhead (MOH) is comprised of the following costs: Paisley anticipates the production of 9,400 blouses and 12,250 pencil skirts. Each product is projected to use company resources in the following manner: What is the ABC-based total MOH cost allocated per unit for the pencil skirts? (If required, round calculations to two decimal places.)

Cost drivers are used in Activity-Based Costing (ABC) to allocate various costs. Which of the following would be an appropriate cost driver for an area such as Marketing?

Eagleton Inc. is a retail business that sells fedoras and other decorative hats. They are in the process of evaluating their costing systems and working towards an Activity-Based Costing (ABC) implementation. They have compiled the following data about their Manufacturing Overhead (MOH) costs: The production department tallied the following amounts in a recent production run: 3,600 square feet; 2,009 supervisor hours; and 998 pounds of indirect materials. What is the total amount of facility-level MOH costs allocated to the production run?

Roland's company makes and sells scarves, and he has just completed his annual financial analysis for the most recent year-end. The company produces two varieties of scarves: Silk and Cotton. Roland used a single plant-wide rate based on Direct Labor (DL) hours this year, just as had for many years prior, but he is not positive that this is the best approach moving forward. Roland has become interested in Activity-Based Costing (ABC). Roland has determined that Manufacturing Overhead (MOH) key activities include: Folding, $19,420.00 (driven by DL hours); Cleaning/Maintenance, $10,330.00 (driven by cleaning/maintenance hours); and Quality Inspections, $4,600.00 (driven by number of inspections). He has compiled the following financial data to assist with his evaluation of the costing systems: If Roland uses ABC, then what will the net operating income be for the cotton scarves? (Do not round the calculations.) This more of a problem than an multiply choice question. I have updated the question to ask for the net operating income, which cut down on the amount of work being completed by the student.

Magic Golf is a small putt putt golf attraction that services a seasonally busy tourist season each summer. Sarah, the Controller, feels that Magic Golf would benefit from adding additional staff to their customer service line. A chief complaint of patrons is that it often takes too long to be checked in upon arrival and to be checked out upon departure. The management of Magic Golf has come to Sarah and asked her to put together some data that will assist them in assessing their strengths and weaknesses. Their business is cyclical, so it is imperative that they are able to determine whether or not they are best using their available resources regardless of the time of year. Sarah has decided to use Time-Driven Activity-Based Costing (TDABC) to assist with any future hiring plans in this area. The costs of assets and personnel in their customer service-based activities are $62,000, and the company has 101,000 minutes of capacity during the most recent year. The key activities for their customer service department and related time per transaction are as follows: The cost incurred of assets and personnel of $62,000 is spread between the quarters in the following way: Quarter 1- 15%, Quarter 2- 35%, Quarter 3 - 45%, and Quarter 4- 5%. Sarah has compiled data and determined that Magic Golf had the following numbers of activities for each quarter: Sarah is hopeful that she can complete her analysis in enough time for management to integrate her findings and suggestions into the next calendar year. Using TDABC, please answer the following questions. (If required, round calculations to two decimal places.) a. With costs assigned to each activity cost pool, calculate the cost per minute to supply an activity. b. Calculate the cost per transaction for each key transaction that Sarah will then use to calculate her cost allocations. Based upon this information, is there an activity that Sarah may want to devote extra attention to while performing her analysis? c. Using Sarah's compiled data, how much total cost was allocated to the customer service area during each quarter? How much was allocated to the customer service area for the year in total? d. Using the percentages noted in the problem (Q1: 15%, Q2: 35%, Q3: 45%, and Q4: 5%), compare the actual costs incurred to the allocation amount calculated in part (c) for each quarter. How do you explain the difference, and which quarter has done the most efficient job of managing its resources? e. Based on Sarah's estimate, do you believe that Magic Golf will need to hire another service employee? Are there any other suggestions or advice that Sarah could give?

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 (DL) cost. What is the per-unit cost for floor lamps under a traditional costing system? What is the per-unit cost for floor lamps under ABC? (Do not round intermediate calculations.)

Swanson Corp. manufactures and sells decorative bird feeders and birdhouses to local vendors. As a new business, they are trying to determine how to appropriately cost their items and have narrowed the choices to a traditional costing system and Activity-Based Costing (ABC) system. Their Direct Materials (DM) include (same for both products): Concrete, $12,500 and wood, $23,620. Their Direct Labor (DL) includes (same for both products): Wages (assembly line worker), $58,900, and Wages (painter), $42,850. Under a traditional costing system, their Manufacturing Overhead (MOH) would be 88% of their direct labor costs. If they decide to go with ABC, then they have identified the following key activities and costs: property tax, $18,400 ($1.50 per square foot); wages (supervisor), $56,800 ($7.10 per hour); and cleaning, $24,700 ($3.81 per hour). Swanson intends to stick to the following production schedule: Bird feeders: 18,640 units; 8,100 square feet; 5,230 supervisor hours; and 3,900 cleaning hours. Birdhouses: 12,307 units; 4,150 square feet; 2,770 supervisor hours; and 2,580 cleaning hours. Under traditional costing, the total product cost for a birdhouse is $18.48. If Swanson chooses to use an ABC system instead of traditional costing system, then what is the difference in total cost per unit for the birdhouses? Seems long for a multiply choice problem. I updated this question to provide traditional cost per unit. This reduces the amount of work needed to do the comparison.

Josephine has been investigating a potential switch to Activity-Based Costing (ABC) for the cookie company where she works. She has decided to focus on their biggest seller, vanilla cookies, before moving forward with this decision. She has gathered the following pertinent financial data: Josephine determined that there are three key activities where Manufacturing Overhead (MOH) costs can be divided along with the total activity for the year: cutting, $34,500 (25,600 direct labor hours); washing cookie trays, $37,900 (15,780 trays washed); and wages for the supervisors, $24,600 (12,630 supervisor hours). Josephine would like to decide soon. What is the total amount of MOH allocated to the vanilla cookies using ABC? (Do not round the calculations.)

Two staff accountants, Michael and Anthony, are having a lively discussion about various costing procedures that are currently in place at the factory where they are employed. The production department has asked the accountants to determine the most effective way in which they can allocate their department costs. The production department has a total Manufacturing Overhead (MOH) cost of $3,660,500. Michael and Anthony have gathered the following cost driver information: Budgeted machine setups 50,460 setups ($1,000,000) Budgeted pounds of indirect material 124,800 pounds ($2,660,500) A recent production run used 400 machine setups and 2,380 pounds of indirect material. How much of the department's MOH cost will be allocated for the most recent run for the batch-level activity? (If required, round calculations to two decimal places.)

An organization currently employs traditional costing for its cost accounting functions. They have computed the following unit costs for two of their current products: Salt, $0.33 per unit; and Pepper, $0.40 per unit. If they were instead using Activity-Based Costing (ABC), then it would have resulted in the following unit costs: Salt, $0.36 per unit; and Pepper, $0.37 per unit. Which of the following statements is correct?