Exam 9: Activity- Based Costing

John is a carpenter who specializes in bathroom renovations for single-owner homes. He believes that he has been underbidding his projects and losing out on potential profit that could make all of the difference for his business's continued viability. He is putting together an estimate for a potential client and has determined the following activities: Previously, John was billing at a flat rate of $6 per square foot with no additional markups. John would like to add a 25% markup to the cost to arrive at a final bid price that will be given to the customer. Using Activity-Based Costing (ABC), what is the final bid price that will be presented to the customer?

Mallard, Corp. produces duck-friendly pellets that it sells to a local marina that fully stocks its vending machines for local tourists. Mark, the accountant at Mallard, would like to suggest the implementation of Activity-Based Costing (ABC) and has identified several activities for the factory. Mallard has the following budgeted costs: Direct Materials (DM), $322,600.00; and Direct Labor (DL), $167,980.00. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $89,550.00 (7,700 setup hours); Production, $498,020.00 (105,200 machine hours); and Maintenance, $52,804.00 (10,300 maintenance hours). How much of the MOH costs will be allocated during the year using activity-based rates considering the actual usage of 807 setup hours, 14,709 machine hours, and 2,600 maintenance hours. (If required, round calculations to two decimal places.)

What is the purpose of traditional job costing, and how is it used for reporting purposes? Why would management consider switching to Activity-Based Costing (ABC)?

Fashion Express, Inc. is a clothing retail vendor that specializes in modern women's clothing. They incurred costs of $164,000 last year to facilitate their staff performing customer service and sales activities. These resources create a capacity of 222,000 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 order, 117,000 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 restocking merchandise transactions? (If required, round calculations to two decimal places.)

Activity-Based Costing (ABC) requires that its users separate costs by the level and then by the type of activity. For a manufacturing business, this would entail separating activity costs into Manufacturing Overhead (MOH) and nonmanufacturing period costs. Which of the following would be considered MOH at the product/process-level?

Samantha is the controller for Tasty Jerky, company that manufactures vegan jerky and currently has two flavors: Cajun and BBQ. Samantha believes that Tasty Jerky is in a great position to transition to Activity-Based Costing (ABC) from a traditional costing system. Tasty Jerky is planning to produce 77,670 bags of Cajun jerky and 81,400 bags of BBQ jerky. Management has asked Samantha to compile costing data using ABC. She has identified the following key activity information: Moving and Sorting Ingredients $98,444 (146,800 pounds) Quality Control $264,306 (14,500 inspections) Each product will require the following amount of each key activity: In addition, Cajun will need $99,430.00 of Direct Materials and $128,900.00 of Direct Labor while BBQ will need $103,220.00 of Direct Materials and $139,800.00 of Direct Labor. Determine the total production costs for Cajun jerky under the ABC system. (If required, round calculations to two decimal places.)

What is the cost hierarchy, and what are the different layers? What is its function amongst the tools that management can use for budgeting?

Flamingo Inc. is an organization that produces pool floats and other pool accessories. They are in the process of transitioning to Activity-Based Costing (ABC) and creating their budget. They have compiled the following budgeted Manufacturing Overhead (MOH) costs that are divided into three key activities: During the current year, Flamingo's pool floats used 4,250 setup hours, 9,600 machine hours, and 2,150 inspection hours. How much of the MOH costs will be allocated to the pool floats this year? (If required, round calculations to two decimal places.)

Peacock Inc. is a contracting business that creates one-of-a-kind murals for each individual client. They have been asked by a potential client to prepare an estimate for the creation of a floral mural for the client's office waiting room. Turner, the main artist for Peacock would like the company to consider updating its billing methods from a flat rate of $370.00 per painting hour to an Activity-Based Costing (ABC) method that would include a markup of 29%. After visiting the client's proposed site, Turner has put together the following estimate for the floral mural: What is the difference in profit for Peacock between the flat rate and the new ABC method proposed by Turner?

Tech Squad is a regional call center that handles customer service calls from people who are experiencing technical issues with their personal devices. Management feels as though they never have an accurate picture of how well they are utilizing their available resources. Their controller has suggested that they consider switching to Time-Driven Activity-Based Costing (TDABC). The controller has identified the following information about their identified key activities: Supporting these activities cost Tech Squad $266,800.00 last year, and they had 375,000 minutes within their capacity. (If required, round calculations to two decimal places.) a. Using TDABC, what is the rate for supplying an activity? b. Using the TDABC rates, what is the total amount allocated to the key activities? c. When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference, and is it over- or underallocated?

Shinebright, Inc., a company that produces sunscreen has asked John to calculate their total product costs. Shinebright currently uses traditional costing and has reported the following costs: Janitorial Wages, $32,300; Factory Workers' Wages, $60,000; Machine Operators' Salaries, $34,616; Chemical Compounds, $51,000; Plastic Containers, $11,000; and their Manufacturing Overhead (MOH) will be 84% of their Direct Labor (DL) costs. What are their total product costs?

A company is currently using traditional costing and has arrived at the following unit costs for their two products: Caramel, $0.88 per unit; and Hot Fudge, $0.77 per unit. If they had instead used Activity-Based Costing (ABC), then it would have resulted in the following unit costs: Caramel, $0.83 per unit; and Hot Fudge, $0.82 per unit. Which of the following statements is correct?

Aubrey is an accountant for Arbor Town, Inc., a tree preservation and removal company. They currently utilize a traditional costing system, and she is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Arbor Town has several customer-centric activities including: initial phone consultation, appointment setting, follow-up, and service calls. Supporting these activities cost Arbor Town $126,500 last year, and Arbor Town has 75,000 minutes within their capacity. Aubrey has compiled the following data: Arbor Town is wondering whether they are utilizing their capacity to its fullest potential and are hopeful that TDABC will help shed some light on the best way they can proceed. (If required, round calculations to two decimal places.) a. What is the cost per transaction for each of the key activities? b. Using the TDABC rates, calculate the total cost of transactions. c. When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference and is it over- or underallocated?

The Manufacturing Overhead (MOH) T-account for companies using Activity-Based Costing (ABC) will typically include which of the following items on the credit side?

Lilly Corp. manufactures office supplies that it specifically creates for recent college graduates. One of their most popular items in recent years is an annual planner that is accompanied by accessories such as stickers and highlighters. Lilly currently uses a single plant-wide rate of $14 per Direct Labor (DL) hour to allocate their Manufacturing Overhead (MOH) costs. Sarah, the controller, would like to determine whether a switch to Activity-Based Costing (ABC) would prove to be a beneficial planning tool for Lilly Corp. moving forward. Sarah has identified three key activities that would be used for ABC: Production, Supervisor Wages, and Quality Inspections. Sarah has compiled the following budgeted MOH cost data for the annual planner: The actual usage of resources for manufacturing the annual planner includes $27,360 in DM costs; 37,000 DL hours; 28,500 machine hours; 4,500 supervisor hours; and 9,800 inspection hours. a. Allocate MOH costs to the production of the annual planner using the previous plant-wide rate. b. How will MOH costs be allocated to the production of the annual planner using ABC rates? c. What could account for the difference between these two different allocations? Which should Sarah advise Lilly Corp. to use moving forward?

In a traditional simple costing system, a plant-wide cost pool accumulates factory-wide Manufacturing Overhead (MOH). What is the correct formula to calculate the plant-wide rate?

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 material. What is the total amount of unit-level MOH costs allocated to the production run? (If required, round calculations to two decimal places.)

Susan is an accountant for Spruce, Inc., a small lawn care business, and she is trying to determine whether or not they should implement Time-Driven Activity-Based Costing (TDABC). Spruce has several customer-centric activities including: Initial Phone Consultation, Appointment Setting, and Sales Follow-Up. Supporting these activities cost Spruce $198,800 last year, and Spruce has 605,800 minutes within their capacity. Susan has gathered the following information: How much total cost would be allocated to the key activities? (Do not round calculations.)

Daisy Company is a mid-sized organization that creates flower-themed home décor items that are sold to both large local and regional stores. They would like to become more organized and are dividing and segmenting their costs into different hierarchies. Which of the following would be considered something other than a product/process-level cost?

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, customers assistance (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 the first quarter? Also, what was the over or underallocation of costs? (If required, round calculations to two decimal places.)