Exam 7: Activity-Based Costing: A Tool to Aid Decision Making

(Appendix 7A)Why would an activity-based costing system that is designed for internal decision making NOT conform to generally accepted accounting principles?

Furniture Company uses an activity-based costing system in which there are three activity cost pools. The company has provided the following data concerning its costs and its activity-based costing system: Costs: Manufacturing overhead \ 600,000 Selling and administrative expenses Total \ 900,000 $\text { Distribution of Resource Consumption: }$ Order Size Customer Support Other Total Manufacturing overhead 45\% 50\% 5\% 100\% Selling and administrative expenses 40\% 45\% 15\% 100\% The "Other" activity cost pool consists of the costs of idle capacity and organization * sustaining costs. You have been asked to complete the first-stage allocation of the costs to the activity cost pools. -How much cost,in total,would be allocated in the first-stage allocation to the Order Size activity cost pool?

Unit-level activities arise as a result of the total volume of production and are performed each time a unit is produced.

Arthur Company has two products: $\mathrm{S}$ and $\mathrm{D}$ . The company uses activity-based costing and has prepared the following analysis, showing the estimated total overhead cost and expected activity for each of its three activity cost pools: Activity Cost Pool Estimated Cost Product S Product D Total Activity 1 \ 20,000 100 400 500 Activity 2 14,600 500 250 750 Activity 3 90,000 300 2,700 3,000 The annual production and sales of Product $\mathrm{S}$ is 4,547 units. The annual production and sales of Product $D$ is 7,913. Direct costs/unit for each product are as follows: Product S Product D Direct Material \ 1.50 \ 1.20 Direct Labour \ 2.00 \ 2.50 -The total production cost per unit of Product D under activity-based costing is closest to which of the following?

Kebort Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labour-hours (DLHs). The company has two products, U86Y and M91F, about which it has provided the following data: U86Y M91F Direct materials per unit \ 19.80 \ 45.80 Direct labour per unit \ 18.20 \ 49.40 Direct labour hours per unit 0.70 1.90 Annual production 40,000 10,000 The company's estimated total manufacturing overhead for the year is $2,541,760 and the company's estimated total direct labour-hours for the year is 47,000. The company is considering using a variation of activity-based costing to determine its unit product costs for externalreports. Data for this proposed activity-based costing system appear below: Activities and Activity Measures Estimated Overhead Cost Supporting direct labour (DLHs) \ 1,175,000 Setting up machines (setups) 407,000 Parts administration (part types) Total \ 2,541,760 $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Expected Activity }$ P85G C43S Total DLHs 28,000 19,000 47,000 Setups 2,256 658 2,914 Part types 1,034 2,162 3,196 - The unit product cost of product U86Y under the company's traditional costing system is closest to:

An activity-based costing system is generally easier to set up and run than a traditional cost system.

Foster Florist specializes in large floral bouquets for hotels and other commercial spaces. The company has provided the following data concerning its annual overhead costs and its activity-based costing system: Overhead costs: Wages and salaries \ 70,000 Other expenses Total \ 120,000 $\text { Distribution of Resource Consumption: }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Making Bouquets Delivery Other Wages and salaries 70\% 20\% 10\% Other expenses 45\% 25\% 30\% The "Other" activity cost pool consists of the costs of idle capacity and organizationsustaining costs. The amount of activity for the year is as follows: Activity Cost Pool Activity Making bouquets 40,000 bouquets Delivery 1,000 delive -What would be the total overhead cost per delivery according to the activity-based costing system,rounded to the nearest whole cent? In other words,what would be the overall activity rate for the Deliveries activity cost pool?

Dideda Company uses an activity-based costing system with three activity cost pools. The company has provided the following data concerning its costs and its activity-based costing system: Costs: Manufacturing overhead \ 360,000 Selling and administrative expenses Total \ 600,000 $\text { Distribution of Resource Consumption: }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Order Size Customer Support Other Total Manufacturing overhead 25\% 65\% 10\% 100\% Selling and administrative expenses 60\% 20\% 20\% 100\% The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs. You have been asked to complete the first-stage allocation of costs to the activity cost pools. -How much cost,in total,should NOT be allocated to orders and customer support in the second stage of the allocation process if the activity-based costing system is used for internal decision making?

Managing and sustaining product diversity requires many more overhead resources,such as production schedulers and product design engineers,than managing and sustaining a single product.The costs of these resources can be accurately allocated to products on the basis of direct labour hours.

Furniture Company uses an activity-based costing system in which there are three activity cost pools. The company has provided the following data concerning its costs and its activity-based costing system: Costs: Manufacturing overhead \ 600,000 Selling and administrative expenses Total \ 900,000 $\text { Distribution of Resource Consumption: }$ Order Size Customer Support Other Total Manufacturing overhead 45\% 50\% 5\% 100\% Selling and administrative expenses 40\% 45\% 15\% 100\% The "Other" activity cost pool consists of the costs of idle capacity and organization * sustaining costs. You have been asked to complete the first-stage allocation of the costs to the activity cost pools. -How much cost,in total,would be allocated in the first-stage allocation to the Customer Support activity cost pool?

Phoenix Company makes custom covers for air conditioning units for homes and businesses.The company uses an activity-based costing system for its overhead costs.The company has provided the following data concerning its annual overhead costs and its activity cost pools: Overhead Costs: Production overhead \ 100,000 Office expenses 50,000 Total \ 150,000 Distribution of Resource Consumption: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Making Cover Job Support Other Total Production overhead 40\% 42\% 18\% 100\% Office expenses 12\% 60\% 28\% 100\% The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs.The amount of activity for the year is as follows: Activity Cost Paol Annual Activity Making covers 2,500 yards Job support 200 jobs Other Not applicable Required: a)Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below: Making Covers Job Support Other Total Production overhead Office experse Total b)Compute the activity rates (i.e.,cost per unit of activity)for the Making Covers and Job Support activity cost pools by filling in the table below: Making Covers Job Support Production overhead Office expense Total c)Prepare a report in good form of a job that involves making 50 yards of covers and has direct materials and direct labour cost of $1,500.The sales revenue from this job is $2,500.

Grogam Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Preparing Meals Arranging Functions Wages \ 1.15 \ 110.00 Supplies \ 0.35 \ 380.00 Other expenses \ 0.25 \ 70.00 The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool. Management would like to know whether the company made any money on a recent function at which 100 meals were served. The company catered the function for a fixed price of $21.00 per meal. The cost of the raw ingredients for the meals was $8.25 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above. -According to the activity-based costing system,what is the total profit margin for this function?

Sarah Company has two products: T and V. The company uses activity-based costing and has prepared the following analysis, showing the estimated total overhead cost and expected activity for each of its three activity cost pools: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Expected Activity }$ Activity Cost Pool Estimated Cost Product T Product V Total Activity 1 \ 30,000 200 400 600 Activity 2 39,000 400 900 1,300 Activity 3 80,000 400 3,600 4,000 The annual production and sales of Product T is 10,640 units. The annual production and sales of Product V is 26,600. -The overhead cost per unit of Product T under activity-based costing is closest to which of the following?

Koszyk Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labour-hours (DLHs). The company has two products, P85G and C43S, about which it has provided the following data: P85G C43S Direct materials per unit \ 36.50 \ 63.10 Direct labour per unit \ 20.80 \ 31.20 Direct labour hours per unit 0.80 1.20 Annual production 35,000 10,000 The company's estimated total manufacturing overhead for the year is $2,264,000 and the company's estimated total direct labour-hours for the year is 40,000. The company is considering using a variation of activity-based costing to determine its unit product costs for externalreports. Data for this proposed activity-based costing system appear below: Activities and Activity Measures Estimated Overhead Cost Supporting direct labour (DLHs) \ 1,160,000 Setting up machines (setups) 288,000 Parts administration (part types) Total \ 2,264,000 $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Expected Activity }$ P85G C43S Total DLHs 28,000 12,000 40,000 Setups 1,480 920 2,400 Part types 1,880 840 2,720 - The total cost of a unit of product P85G under the company's traditional costing system is closest to:

Groce Catering uses activity-based costing for its overhead costs. The company has provided the following data concerning the activity rates in its activity-based costing system: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Preparing Meals Arranging Functions Wages \ 0.70 \ 145.00 Supplies \ 0.45 \ 230.00 Other expenses \ 0.40 \ 100.00 The number of meals served is the measure of activity for the Preparing Meals activity cost pool. The number of functions catered is used as the activity measure for the Arranging Functions activity cost pool. Management would like to know whether the company made any money on a recent function at which 150 meals were served. The company catered the function for a fixed price of $14.00 per meal. The cost of the raw ingredients for the meals was $8.75 per meal. This cost is in addition to the costs of wages, supplies, and other expenses detailed above. -According to the activity-based costing system,what was the total cost (including the costs of raw ingredients)of the function mentioned above,rounded to the nearest whole dollar?

Furniture Company uses an activity-based costing system in which there are three activity cost pools. The company has provided the following data concerning its costs and its activity-based costing system: Costs: Manufacturing overhead \ 600,000 Selling and administrative expenses Total \ 900,000 $\text { Distribution of Resource Consumption: }$ Order Size Customer Support Other Total Manufacturing overhead 45\% 50\% 5\% 100\% Selling and administrative expenses 40\% 45\% 15\% 100\% The "Other" activity cost pool consists of the costs of idle capacity and organization * sustaining costs. You have been asked to complete the first-stage allocation of the costs to the activity cost pools. -How much cost,in total should not be allocated to orders and customer support in the second stage of the allocation process if the activity-based costing system is used for internal decision making?

In activity-based costing,as in traditional costing systems,non-manufacturing costs are not assigned to products.

Setting up equipment is an example of an activity at which of the following levels?

In activity-based costing,a plant-wide overhead rate is used to apply overhead to products.

Bullie Manufacturing Corporation has a traditional costing system in which it applies manufacturing overhead to its products using a predetermined overhead rate based on direct labour-hours (DLHs).The company has two products,D31X and U75X,about which it has provided the following data: D31X U75X Direct materials per unit \ 29.20 \ 47.40 Direct labour per unit \ 1.10 \ 23.10 Direct labour hours per unit 0.10 2.10 Annual production 35,000 15,000 The company's estimated total manufacturing overhead for the year is $1,147,650 and the company's estimated total direct labour-hours for the year is 35,000. The company is considering using a variation of activity-based costing to determine its unit product costs for external reports.Data for this proposed activity-based costing system appear below: Activities and Activity Measures Estimated Overhead Cost Assembling products (DLHs) \ 140,000 Preparing batches (batches) 241,150 Axial milling (MHs) 766,500 Total \ 1,147,650 Activities D31X U75X Total Assembling products 3,500 31,500 35,000 Preparing batches 560 1,295 1,855 Axial milling 1,540 1,015 2,555 Required: a.Determine the manufacturing overhead cost per unit of each of the company's two products under the traditional costing system. b.Determine the manufacturing overhead cost per unit of each of the company's two products under activity-based costing system.