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

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?

Accola Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 1,100 units and of Product B is 700 units. The direct production costs (material and labour) for Product A are $110,600 and for B is $70,000. There are three activity cost pools for overhead, with estimated 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 Cost Product A Product B Total Activity 1 \ 18,270 600 500 1,100 Activity 2 35,891 1,600 300 1,900 Activity 3 48,796 440 420 860 -The activity rate for Activity 3 is closest to which of the following?

Changing a cost accounting system is likely to meet with little resistance in an organization since it is a technical matter of little interest to individuals outside of the accounting department.

-To the nearest whole dollar,how much wages and salaries cost would be allocated to a customer who placed eight orders in a year?

Addison Company has two products: A and B. Annual production and sales are 800 units of Product A and 700 units of Product B. The company has traditionally used direct labour-hours as the basis for applying all manufacturing overhead to products. Product A requires 0.2 direct labour hours per unit and Product B requires 0.6 direct labour hours per unit. The total estimated overhead for next period is $71,286. 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 \ 20,272 300 500 800 Activity 2 29,380 800 500 1,300 General Factory 160 420 580 Total \ 71,286 (Note: The General Factory activity cost pool's costs are allocated on the basis of direct labour hours.) -(Appendix 7A)The predetermined overhead rate under the traditional costing system is closest to:

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?

Activity-based costing uses a number of activity cost pools,each of which is allocated to products on the basis of direct labour hours.

-What would be the total overhead cost per order 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 Filling Orders 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 predetermined overhead rate under the traditional costing system is closest to which of the following?

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 Customer Support activity cost pool?

Mike Kyekyeku is a sole proprietorship that provides consulting and tax preparation services to its clients.Mike charges a fee of $100 per hour for each service and can devote a maximum of 4,000 hours annually to his clients.He reported the following revenues and expenses for 2014: Revenue \4 00,000 Expenses (All overhead costs): Secretarial support \ 84,000 Supplies 72,000 Computer costs, etc. Net income (loss) \ 196,000 Being an accountant,Mike kept good records of the following data for 2014: (i).Revenue: Tax preparation \ 130,000 Consulting 270,000 Total \ 400,000 (ii). $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { ACTIVITY LEVEL }$ Overhead Cost Cost Driver Tax Consulting Total Secretarial support Number of clients 72 48 120 Supplies Tr Answeractions with clients 200 300 500 Computer costs, etc. Computer hours 1,000 600 1,600 Required: a.Should Mike emphasize one service more than the other if Mike were to allocate all the overhead costs using direct-labours as the only overhead cost driver (1,300 for Tax and 2,700 for Consulting)? Support your decision with the relevant calculations and/or analysis. b.Identify each of the three cost drivers as either unit-level,batch-level,product-level,customer-level,or organization-sustaining. c.How might Mike's product/service emphasis decision in Partaabove be altered if he were to allocate all the overhead costs using activity-based costing and the three cost drivers,that is,number of clients,number of transactions with clients,and computer hours? Show all your supporting calculations and/or analysis,including any necessary explanation.

In traditional costing systems,all manufacturing costs are assigned to products-even manufacturing costs that are not caused by the products.

When combining activities in an activity-based costing system,activities should be grouped together at the same level.For example,batch-level activities should not be combined with unit-level activities.

Dierich 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 \ 600,000 Selling and administrative expenses Total \ 820,000 $\text { Distribution of Resource Consumption: }$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Order Size Customer Support Other Total Manufacturing overhead 15\% 75\% 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?

Selena Company has two products: A and B.The company uses activity-based costing.The estimated total cost and expected activity for each of the company's three activity cost pools are as follows: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Expected Activity }$ Activity Cost Panl Estimated Cost Product A Product B Total Activity 1 \ 17,600 800 300 1,100 Activity 2 12,000 500 200 700 Activity 3 26,000 800 400 1,200 The activity rate under the activity-based costing system for Activity 3 is closest to which of the following?

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 was the total cost (including the costs of raw ingredients)of the function mentioned above,rounded to the nearest whole dollar?

Kya,Inc.manufactures two models of high-pressure steam valves,the XR7 model and the ZD5 model.Budgeted manufacturing overhead cost and operating data regarding production and sales of 2,000 units of the XR7 model and 8,000 units of the ZD5 model for 2005 follow: Required: a)Identify and briefly explain each of the three cost drivers as either unit-level or batch-level or product-level or organization-sustaining level. b)Calculate the budgeted manufacturing overhead cost for each unit of the two models,using only one unit-level cost driver. c)Calculate the budgeted manufacturing overhead cost for each unit of the two models,using the activity-based-costing (ABC)method. d)Assume Kya,Inc.will use only the unit-level driver.Compared to the ABC method,by how much (in terms of total allocated/applied manufacturing overhead cost),if any,will the total output of each model be either under-costed or over-costed? e)Is the result obtained in part (d)above consistent with your expectations? Explain.

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 bouquet 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 Making Bouquets activity cost pool?

Transaction drivers usually take more effort to record than duration drivers.

Fife & Jones PLC,a consulting firm,uses an activity-based costing 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: Wages and salaries \ 540,000 Travel expenses 100,000 Other experses \ 140,000 Total \ 780,000 Distribution of Resource Consumption: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Working on Engagements Busines Development Other Total Wages and salaries 50\% 20\% 30\% 100\% Travel experses 60\% 30\% 10\% 100\% Other experses 35\% 25\% 40\% 100\% Required: a)How much cost,in total,would be allocated to the Working On Engagements activity cost pool? b)How much cost,in total,would be allocated to the Business Development activity cost pool? c)How much cost,in total,would be allocated to the Other activity cost pool?