Exam 9: Activity- Based Costing

How many steps are involved in implementing activity-based costing? Please discuss each in addition to describing what each step will entail.

Delightful Desserts manufactures gluten-free desserts, including their three most popular items: Cheesecake, Brownies, and Cherry Pie. Their controller, Jennifer, has been compiling data for their yearly budget planning strategy meeting and the recommendation will be to continue using a traditional costing system as they have since inception. Delightful Desserts assigns their Manufacturing Overhead (MOH) costs based on 89% of their Direct Labor (DL) costs. Jennifer has gathered the following cost information to assist budget makers with the appropriate cost allocations for each dessert type: (If required, round calculations to two decimal places.) a. What are the total product costs for each of the three desserts? b. What is the total cost per unit for each of the three desserts? c. Are there any additional recommendations that Jennifer could make to management about the evaluation of their manufacturing overhead cost allocations?

Charles has been compiling year-end financial data for the painting business where he works. The company specializes in the painting of both residential and commercial properties. Charles would like to determine which division is more profitable for the company so that they can shift costs appropriately. Charles used activity-based costing based on support costs to allocate the Manufacturing Overhead (MOH) costs. He performed calculations and allocations and determined the following division information: Based upon the information provided by Charles, use vertical analysis to determine the profitability of each division using percentage of sales as the indicator.

Susan is currently working on assembling some numbers for her client's cost accounting practices for the current year. The client is a factory that produces condiments including ketchup and mustard. They use traditional costing, and Susan would like to calculate total cost per unit. They have the following costs (same for both condiments): Direct Materials (DM), $87,444; Direct Labor (DL), $96,782; and their Manufacturing Overhead (MOH) will be 88% of their DL cost. They produced 42,760 units of ketchup and 53,990 units of mustard during the period. What is their total cost per unit for mustard?

The Concrete Rose has been a staple of their community for several decades. As the owner retires and promotes his daughter Moira to CEO of this successful music venue, the management staff has prepared suggestions for improvements. At the top of their list is the implementation of Time-Driven Activity-Based Costing (TDABC) instead of their current traditional costing methods. With this new change, the management team believes they can optimize their earnings. They compiled the following data about their identified key activities: The Concrete Rose spent $389,500 to operate the ticketing department, and these resources created a capacity of 495,000 minutes. If actual costs incurred to operate the activities are compared to the allocated costs, what is the difference, and is it over- or underallocated? (If required, round calculations to two decimal places.)

Tasty Sauce, Inc. is currently comparing their current use of traditional costing with what results would look like if they had instead implemented Activity-Based Costing (ABC). This company creates two products: regular soy sauce and sodium-free soy sauce. They will be producing 125,000 bottles of regular soy sauce and 108,000 bottles of sodium-free soy sauce. Under traditional costing, Manufacturing Overhead (MOH) is allocated at $43,760.80 to regular soy sauce and $16,482.20 to sodium-free soy sauce. In ABC, MOH is allocated at $39,802.62 to regular soy sauce and $20,440.38 to sodium-free soy sauce. Which of the following is true?

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. When comparing actual costs incurred to operate the activities to the allocated costs, what is the difference, and is it overallocated or underallocated?

Sparrow, Inc. produces birdseed that it sells to regional markets. Susan, the accountant at Sparrow, is evaluating the impact of Activity-Based Costing (ABC) on several activities for the factory. Sparrow has the following budgeted costs: Direct Materials, $150,000; and Direct Labor, $98,000. Their budgeted Manufacturing Overhead (MOH) costs are comprised of the following: Setup, $75,000 (1,000 setup hours); Production, $376,000 (50,000 machine hours); and Maintenance, $63,400 (12,000 maintenance hours). Allocate MOH costs to Setup activity using the budgeted activity-based rate considering the actual usages of 262 setup hours, 13,409 machine hours, and 3,432 maintenance hours. I would replace with a product name. Allocating Setup costs to Setup activity is confusing. This question is about allocating MOH costs for setup activity instead of allocating setup costs. And, if the activity is Setup, wouldn't it make sense to leave it named as Setup?

Briefly describe what a cost driver is, and name a few examples. What goals should management keep in mind as they decide upon what to use as a cost driver?

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 it 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 cost per unit for the veggie pizzas? (Do not round intermediate calculations.)

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 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 final bid price that Peacock will present to the client as per new estimated rates?

Robert has been evaluating all costing data after he realized how small his margin for dinner plates had become. These plates have become the focal point for the organization so Robert has a vested interest in increasing the margin per plate. He has spent time aligning with beneficial suppliers and reducing his material cost and streamlined labor usage in a successful effort to minimize labor costs as well. The remaining task in this journey to improve margin is to evaluate the allocation of manufacturing overhead (MOH) costs that are estimated to be $563,559.00 for the year. Three main cost drivers and their related information are as follows: How much of the MOH costs would be allocated to dinner plates if Robert chooses to utilize an activity-based approach instead of a single plant-wide rate? (If required, round calculations to two decimal places.)

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 unit-level activity? (If required, round calculations to two decimal places.)

Paul runs the call center for Igloo Corp., a company that specializes in handling customer calls for other businesses. Igloo is currently using a traditional costing system, but Paul feels that management would be better served by implementing Time-Driven Activity-Based Costing (TDABC) and has identified the following pertinent information: They incurred $198,000.00 last year to complete these key activities. Assume that employees handled the following number of calls during the year: Tech Issue Resolution, 19,700 calls; Customer Product Return, 7,650 calls; and Customer Complaints, 10,850 calls. When comparing actual costs incurred to operate the activities to the allocated costs, what is the difference and is it over- or underallocated? (If required, round calculations to two decimal places.)

Bill owns Owens Construction, a small general contractor organization that specializes in high-end bathroom renovations. Currently Bill is billing at a flat rate of $30.00 per square foot of the space being demolished. Bill is concerned that his current method results in underbidding his projects and missing out on additional profit. He is putting together an estimate for Leslie, a potential bathroom remodel client, and has determined the following activities are needed to complete the job: Bill would like to add a 30% markup to the cost to arrive at the final bid price. Use Activity-Based Costing (ABC) to answer the following questions. a. What is the initial pre-markup price for all of the estimated work? b. What is the final bid price that Bill will present to the customer? c. How much profit will Bill make and/or lose if he chooses to use ABC rather than his current flat rate?

Eugene is the manager for Levy Corp, an HVAC company, and he is debating the implementation of Time-Driven Activity-Based Costing (TDABC). After meeting with management, he has realized that the company may not be fully utilizing their available capacity, and he believes this method will better shed some light on their current state of affairs. Eugene will begin his analysis with the customer service center. This department stays very busy and handled the following volume of activities: cold sales calls, 7,490 calls; repeat service calls, 5,806 calls; and customer concerns and complaints calls, 1,300 calls. They spent $65,000.00 last year to operate these activities. Eugene has performed an analysis and determined the following: When you compare actual costs incurred to operate the activities to the allocated costs, what is the difference, and is that amount therefore over- or underallocated? (If required, round calculations to two decimal places.)

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 has determined that there are three key activities where Manufacturing Overhead (MOH) costs can be divided along with the total activity for the year: cutting, $34,500.00 (25,600 direct labor hours); washing cookie trays, $37,900.00 (15,780 trays washed); and wages for the supervisors, $24,600.00 (12,630 supervisor hours). Josephine would like to decide soon. If she uses ABC, then what will the net operating income per unit be for the vanilla cookies? (Do not round the calculations.)

Premium Pizza, Inc. is in the process of documenting all their costs using Activity-Based Costing (ABC). Premium specializes in unique sauces, and they have assigned the following Manufacturing Overhead (MOH) costs to their key activities: Moving and Sorting (150 pounds moved), $32,000; Quality Control (800 inspections completed), $22,400; and Cleaning/Maintenance (2,050 cleaning/maintenance hours) $16,820. They bottled a total of 440 red sauce units and 336 white sauce units during the year. How much of the quality control MOH would be allocated to red sauce units?

The management team at Diamondz, Inc., a manufacturer of fine jewelry, is gearing up for their new fiscal year. Part of their yearly process includes analyzing the past year's performance and seeking ways to improve upon existing processes. Diamondz specializes in two products: diamond rings and diamond necklaces. Management has decided that they would like to begin using Activity-Based Costing (ABC) for budgeting their Manufacturing Overhead (MOH) costs. They have narrowed their key activities to the following: Diamondz has determined that the 18,900 rings they produce will use the following: $130,000 of direct materials, $52,600 of direct labor, 6,200 setups, 12,400 inspections, 26,350 machine hours, and 12,444 square feet. The 15,680 necklaces they produce will use the following: $227,400 of direct materials, $86,700 of direct labor, 3,800 setups, 9,060 inspections, 16,350 machine hours, and 7,556 square feet. What is the total per-unit cost for the diamond necklaces? (If required, round calculations to two decimal places.)

Fly Ball Inc. is a sporting goods company that produces baseballs and baseball mitts that it sells online. Fly Ball 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: Setups $98,500 (18,000 setups) Quality Inspections $104,620 (29,300 inspections) Factory Supervisor Wages $122,480 (8,600 hours) Fly Ball anticipates the production of 15,482 baseballs and 9,877 baseball mitts. Each product is projected to use company resources in the following manner: (If required, round calculations to two decimal places.) a. What is the total MOH cost for the baseballs? b. What is the total amount of MOH allocated per unit to the baseballs? c. What is the total MOH cost for the baseball mitts? d. What is the total amount of MOH allocated per unit to the baseball mitts? e. Why should Fly Ball seriously consider implementing ABC instead of their current traditional costing system?