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

Why may departmental overhead rates NOT correctly assign overhead costs?

Acton Company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 500 units. The company has traditionally used direct labour hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour hours per unit, and Product B requires 0.2 direct labour hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows: (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour hours.) -The overhead cost per unit of Product B under the traditional costing system is closest to which of the following?

Acton Company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 500 units. The company has traditionally used direct labour hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour hours per unit, and Product B requires 0.2 direct labour hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows: (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour hours.) -The predetermined overhead rate under the traditional costing system is closest to which of the following?

Torri 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,B40W and C63J,about which it has provided the following data: B40W C63 Direct materials per unit \ 34.90 \ 63.70 Direct labour per unit \ 20.80 \ 62.40 Direct labour hours per unit 0.80 2.40 Annual production 35,000 15,000 The company's estimated total manufacturing overhead for the year is $2,656,000 and the company's estimated total direct labour-hours for the year is 64,000. 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) \ 1,216,000 Preparing batches (batches) 480,000 Milling (MHs) \ 960,000 Total \ 2,656,000 Activities B40W C63J Total Assembling products 28,000 36,000 64,000 Preparing batches 2,304 2,496 4,800 Milling 1,088 2,112 3,200 Required: a.Determine the unit product cost of each of the company's two products under the traditional costing system. b.Determine the unit product cost of each of the company's two products under activity-based costing system.

Matt Company uses activity-based costing.The company has two products: A and B.The annual production and sales of Product A is 5,000 units and of Product B is 7,000 units.There are three activity cost pools,with estimated total cost and expected activity as follows: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Expected Activity }$ Activity Cost Pool Estimated Cost Product A Product B Total Activity 1 \ 24,000 200 400 600 Activity 2 36,000 700 200 900 Activity 3 81,200 800 3,00 3,800 The cost per unit of Product B under activity-based costing is closest to which of the following?

Binegar 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, R58G and R09O, about which it has provided the following data: - The manufacturing overhead that would be applied to a unit of product R09O under the activity-based costing system is closest to:

Hasty Hardwood Floors installs oak and other hardwood floors in 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-based costing system: Overhead Costs: Production overhead \ 190,000 Office expense \ 140,000 Total \ 330,000 Distribution of Resource Consumption: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Installing Floors Job Support Other Total Production overhead 40\% 40\% 20\% 100\% Office expenses 10\% 60\% 30\% 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 Pool Annual Activity Installing floors 200 squares Job support 160 jobs Other Not applicable A "square" is a measure of area that is roughly equivalent to 1,000 square metres. Required: a)Prepare the first-stage allocation of overhead costs to the activity cost pools by filling in the table below: Installing Floors Job Support Other Total Production overhead Office expense Total b)Compute the activity rates (i.e.,cost per unit of activity)for the Installing Floors and Job Support activity cost pools by filling in the table below: Installing Floors Job Support Production overhead Office expense Total c)Compute the overhead cost,according to the activity-based costing system,of a job that involves installing 3.4 squares.

Which of the following would be classified as a product-level activity?

-What would be the total overhead cost per customer according to the activity-based costing system,rounded to the nearest whole dollar? In other words,what would be the overall activity rate for the Customer Support activity cost pool?

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 activity rate under the activity-based costing system for Activity 3 is closest to which of the following?

Davis 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 \ 400,000 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 35\% 55\% 10\% 100\% Selling and administrative expenses 50\% 30\% 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 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?

Which of the following activity levels is an example of the clerical activity associated with processing purchase orders to produce an order for a standard product?

Diehl 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 \ 480,000 Selling and administrative expenses Total \ 580,000 $\text { Distribution of Resource Consumption: }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Order Size Customer Support Other Total Manufacturing overhead 5\% 85\% 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?

Acton Company has two products: A and B. The annual production and sales of Product A is 800 units and of Product B is 500 units. The company has traditionally used direct labour hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour hours per unit, and Product B requires 0.2 direct labour hours per unit. The total estimated overhead for next period is $92,023. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for external reports. The new activity-based costing system would have three overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows: (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour hours.) -The overhead cost per unit of Product A under the activity-based costing system is closest to which of the following?

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,would be allocated in the first-stage allocation to the Customer Support activity cost pool?

Diehl 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 \ 480,000 Selling and administrative expenses Total \ 580,000 $\text { Distribution of Resource Consumption: }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Order Size Customer Support Other Total Manufacturing overhead 5\% 85\% 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,would be allocated in the first-stage allocation to the Order Size activity cost pool?

Most organizations that use ABC have two costing systems-the official costing system,which is used to prepare external financial reports,and the ABC system,which is used for internal decision making and for managing activities.

-What would be the total overhead cost per customer according to the activity-based costing system,rounded to the nearest whole dollar? In other words,what would be the overall activity rate for the Customer Support activity cost pool?

Addy Company has two products: A and B. The annual production and sales of Product A is 1,700 units and of Product B is 1,100 units. The company has traditionally used direct labour hours as the basis for applying all manufacturing overhead to products. Product A requires 0.3 direct labour hours per unit, and Product B requires 0.6 direct labour hours per unit. The total estimated overhead for next period is $98,785. The company is considering switching to an activity-based costing system for the purpose of computing unit product costs for externalreports. The new activity-based costing system would have three factory overhead activity cost pools-Activity 1, Activity 2, and General Factory-with estimated overhead costs and expected activity as follows: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Expected Activity }$ Activity Cost Pool Estimated Overhead Cost Product A Product B Total Activity 1 \ 30,528 1,000 600 1,600 Activity 2 17,385 1,700 200 1,900 General Factory 510 660 1,170 Total \ 98,785 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour hours.) -The overhead cost per unit of Product B under the activity-based costing system is closest to which of the following?

Which of the following types of costs present the greatest difficulty in efforts to trace them to products and services?