Exam 6: Activity-Based Costing

The Emmanuele Company has collected the following data for use in calculating product costs: Activity Data: (expected and actual) Mops Brooms Total Units produced 50,000 250,000 300,000 Prime costs \ 200,000 \ 750,000 \ 950,000 Direct labour hours 10,000 40,000 50,000 Machine hours 20,000 10,000 30,000 Number of setups 25 75 100 Inspection hours 1,200 2,800 4,000 Number of moves 140 210 350 Departmental Data: (expected and actual) Moulding Assembly Total Direct labour hours Mops 5,000 5,000 10,000 Brooms 5,000 35,000 40,000 Total 10,000 40,000 50,000 Machine hours Mops 17,000 3,000 20,000 Brooms 3,000 7,000 10,000 Total 20,000 10,000 30,000 Overhead costs Machining \ 120,000 \ 30,000 \ 150,000 Moving materials 40,000 30,000 70,000 Setting up 70,000 10,000 80,000 Inspecting products 20,000 30,000 50,000 Total 250,000 \ 100,000 \ 350,000 -Refer to the figure.Emmanuele Company uses departmental overhead rates: Moulding uses machine hours and Assembly uses labour hours.What is the unit product cost for brooms if departmental overhead rates are used?

Account balances are as follows: Manufacturing overhead \ 240,000 underapplied Work in process 100,000 Finished goods 300,000 Cost of goods sold 800,000 If underapplied or overapplied overhead is material and is allocated to work in process,finished goods,and cost of goods sold (based on ending account balances),what would be the balance of cost of goods sold after adjustment?

Owens Corporation 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 (plant-wide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Enginering \1 ,000,000 Setups 900,000 Machiring 2,000,000 Inspection 800,000 Providing space 250,000 Providing utlities 180,000 Activity drivers for each activity have been identified and their practical capacities listed: Machine hours 25,000 Setups 200 Engineering hows 5,000 Inspection hours 2,500 The costs of facility-level activities are assigned using machine hours. -Refer to the figure.What is the unit-level activity?

Spear Manufacturing has four categories of overhead. The four categories and expected overhead costs for each category for next year are as follows: Maintenance \ 180,000 Materials handling 27,000 Setups 24,000 Inspection 90,000 Currently,overhead is applied using a predetermined overhead rate based upon budgeted direct labour hours; 20,000 direct labour hours are budgeted for next year. The company has been asked to submit a bid for a proposed job.The plant manager feels that obtaining this job would result in new business in future years.Usually bids are based upon full manufacturing cost plus 15 percent.Estimates for the proposed job are as follows: Direct materials \ 3,000 Direct labour ( 600 hours) \ 9,000 Number of material moves 4 Number of inspections 6 Number of setups 80 Number of machine hours 8 In the past,full manufacturing cost has been calculated by allocating overhead using a volume-based activity driver,direct labour hours.The plant manager has heard of a new way of applying overhead that uses cost pools and activity drivers.Expected activity for the four activity drivers that would be used are: Machine hours 5,000 Material moves 600 Setups 200 Quality inspections 1,000 -Refer to the figure.If material moves are used to assign material handling costs,what would be the amount of material handling costs allocated to the proposed job?

In a time-driven ABC system,what is the next step after managers calculate the cost of per time unit of supplying resources to activities?

The following information is provided: Estimated manufacturing overhead \ 690,000 Estimated machine hours 46,000 Actual machine hours worked 50,000 Actual costs incurred: Indirect materials \ 170,000 Indirect labour 230,000 Utilities 120,000 Insurance 100,000 Rent 80,000 -Refer to the figure.What is the amount of overapplied or underapplied overhead?

Zipp Company manufactures two products (X and Y). The overhead costs ($84,000) have been divided into three cost pools that use the following activity drivers: Product Number of setups Machine Hours Packine Orders 10 500 75 Y 10 2,000 175 Cost per pod \ 9,000 \ 60,000 \ 15,000 -Refer to the figure.Using functional-based costing,what is the amount of overhead cost to be assigned to Product X using machine hours as the allocation base?

Riley,Inc.has identified the following overhead costs and activity drivers for next year: Expected Expected 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 \ 375 \ 1,000 Direct labour \ 350 \ 1,200 Units completed 100 160 Direct labour hours 50 80 Number of setups 1 4 Number of orders 4 5 Machine hours 20 25 Kiloxratt houre 30 50 The company's normal activity is 4,000 direct labour hours. If the activity drivers are used to allocate overhead costs,what would the unit cost (rounded to two decimal places)for Job BB be?

The Hampshire Company produces 9 volt batteries and AAA batteries. The Hampshire Company uses a plant-wide rate to apply overhead based on direct labour hours. The following data is given: Actual overhead \ 325,000 Estimated overhead \ 350,000 Estimated activity: 9 volt battery 100,000 direct labour hours AAA battery 400,000 direct labour hours Actual activity: 9 volt battery 125,000 direct labour hours AAA battery 400,000 direct labour hours Units produced: 9 volt battery 500,000 AAA battery 250,000 -Refer to the figure.How much was overhead overapplied or underapplied?

Manchester Manufacturing Company has an accounts receivable department that performs three activities within the department: processing customer credit applications,invoicing customers,and performing collection activities.During interviews,the employee survey reports that employees spend 15 percent of their time processing credit applications,55 percent of their time invoicing customers,and 30 percent of their time on collection activities.The accounts receivable department employs 10 associates for a total cost of $200,000.Assume each associate works 8 hours per day,20 days per month,but an estimate of practical capacity is 80 percent.After close observation of the employees' daily work,managers conclude the following: Processing a credit application: 35 minutes Invoicing a customer: 10 minutes Collection activities: 20 minutes The estimated monthly quantities of work in the three activities are 500 credit applications,18,000 invoices,and 900 collection calls. 1. Under a tradional ABC system, what is the cost of ane unit of actrity? 2. Assuring the practical capacity information, what is the cost per minute of supplying capacity? 3. Under time-driven ABC, what are the cost driver rates for each activity?

Owens Corporation 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. Costs have been assigned to each activity using direct tracing and resource drivers: Activity Expected Cost Activity Driver Activity Capacity Engineering \ 1,000,000 engineerng hours 5,000 hours Setups \ 900,000 setups 200 setups Machining \ 2,000,000 machine hours 25,000 machine hours Inspection \ 800,000 inspection hours 2,500 inspection hour Owens produces two models: Model X and Model Y.The following table shows how the two products consume activity. Model X Model Y Units completed 300,000 200,000 Engineering hours 1,000 4,000 Setups 80 120 Machine hours 20,000 5,000 Inspection hours 1,500 1,000 -Refer to the figure.Using the activity ratios for engineering and machining,what is the overhead cost assigned to the engineering pool (rounded to two decimal places)?

If activity-based costing is used,what type of activity would modifications made by engineering to the product design of several products be classified as?

Owens Corporation 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 (plant-wide) and providing space. Costs have been assigned to each activity using direct tracing and resource drivers: Enginering \1 ,000,000 Setups 900,000 Machiring 2,000,000 Inspection 800,000 Providing space 250,000 Providing utlities 180,000 Activity drivers for each activity have been identified and their practical capacities listed: Machine hours 25,000 Setups 200 Engineering hows 5,000 Inspection hours 2,500 The costs of facility-level activities are assigned using machine hours. -Refer to the figure.What is the facility-level activity?

What costing method first traces costs to a department and then to products?

Jones manufacturing has used activity based costing to assign costs to Models X and Y as given in the table below: ModelX ModelY Units produced 24,000 30,000 Machine hours 7,500 8,500 Direct labour hours 8,000 12,000 Material handling (number of moves) 4,000 6,000 Setups 5,000 7,000 Purchase orders 30 40 nspections 10,000 14,000 Product line variatinns. 8 12 The following overhead costs are reported for the following activities of the production process: Material handling \ 40,000 Labour-related overhead 120,000 Setups 60,000 Product design 100,000 Batch inspections 120,000 Central purchasing 70,000 Jones manufacturing has used activity based costing to assign costs to Models X and Y as given in the table below: Activity Cost Pool Model Model X Model Model Y Pool Driver Rate X Cost Y Cost Total Activity Activity Material handling \ 40,000 10,000 \ 4 4,000 \ 16,000 6,000 \ 24,000 \ 40,000 Labour- related overhead \ 120,000 20,000 \ 6 8,000 \ 48,000 12,000 \ 72,000 \ 120,000 Setups \ 60,000 12,000 \ 5 5,000 \ 25,000 7,000 \ 35,000 \ 60,000 Product design \ 100,000 20 \ 5,000 8 \ 40,000 12 \ 60,000 \ 100,000 Batch inspections \ 120,000 24,000 \ 5 10,000 \ 50,000 14,000 \ 70,000 \ 120,000 Central purchasing \ 70,000 70 \ 1,000 30 \ 30,000 40 \ 40,000 \ 70,000 Total \ 209,000 \ 301,000 \ 510,000 Jones Manufacturing wants to implement an approximately relevant ABC system by using the two most expensive activities for cost assignment. -Refer to the figure.Under this new approach,what is the new pool rate for labour-related costs?

When can product costs be distorted if a unit-based activity driver is used?

What is the impact of the use of unit-based activity drivers to assign costs?

The Xiang plant has two categories of overhead: maintenance and inspection. Costs expected for these categories for the coming year are as follows: Maintenance \ 50,000 Inspection 75,000 The plant currently applies overhead using direct labour hours and expected capacity of 50,000 direct labour hours.The following data have been assembled for use in developing a bid for a proposed job: Direct materials \ 500 Direct labour \ 2,000 Machine hours 500 Number of inspections 4 Direct labour hours 800 Total expected machine hours for all jobs during the year is 25,000,and the total expected number of inspections is 1,500. -Refer to the figure.Using direct labour hours to assign overhead,what would be the total cost of the potential job?

Newman Company recently installed an activity-based relational database. Using the information contained in the activity relational table, the following pool rates were computed: $400 per purchase order $24 per machine hour, Process 1 $30 per machine hour, Process 2 $80 per engineering hour Two products are produced by Special Products: X and Y. The plant has two manufacturing processes, Process 1 and Process 2. Other processes include engineering, product handling, and procurement. Product X goes through Process 1 while Product Y goes through Process 2. The product relational table for Special Products is as follows: Product X: Activity Driver \# and Name Activity Usage 1 Units 200,000 2 Purchase orders 250 3 Machine hours 80,000 4 Engineering hours 1,250 Product X: Activity Driver \# and Name Activity Usage 1 Units 25,000 2 Purchase orders 125 3 Machine hours 10,000 4 Engineering hours 1,500 -Refer to the figure.How much machine overhead cost will be assigned to Product Y using Process 2?

When do unit-level cost drivers create distortions?