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

Ingersol Draperies makes custom draperies 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 \ 120,000 Office expense 120,000 Total \ 240,000 Distribution of Resource Consumption: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Making Drapes Job Support Other Total Production overhead 35\% 45\% 20\% 100\% Office expenses 5\% 65\% 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 Making drapes 2,000 metres Job support 160 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: Answer: Making Drapes Job Support Other Total Production overhead Office expense Total b)Compute the activity rates (i.e.,cost per unit of activity)for the Making Drapes and Job Support activity cost pools by filling in the table below: Making Drapes Job Support Production overhead Office expense Total c)Compute the total overhead assigned to a job that involves making 71 metres of drapes.

Activity-based costing is a costing method that is designed to provide managers with cost information for strategic and other decisions that potentially affect only variable 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 predetermined overhead rate (i.e.,activity rate)for Activity 1 under the activity-based costing system is closest to which of the following?

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 traditional costing system is closest to which of the following?

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 activity rate under the activity-based costing system for Activity 2 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 C43S under the activity-based costing system is closest to:

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 total annual production cost for Product B is closest to which of the following?

Monson Company has two products: G and P. 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 G Product P Total Activity 1 \ 30,000 200 400 600 Activity 2 24,000 600 900 1,500 Activity 3 80,000 400 3,600 4,000 The annual production and sales of Product G is 10,640 units. The annual production and sales of Product P is 26,600. -The overhead cost per unit of Product G under activity-based costing is closest to which of the following?

-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?

Human resource management is an example of an activity at which of the following levels?

Paul 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 Pool Estimated Cost Product A Product B Total Activity 1 \ 22,000 400 100 500 Activity 2 16,240 380 200 580 Activity 3 14,600 500 250 750 The activity rate under the activity-based costing system for Activity 3 is closest to which of the following?

Bridget Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 2,000 units and of Product B is 3,000 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 \ 9,000 400 350 750 Activity 2 12,000 100 400 500 Activity 3 48,000 400 1,200 1,600 -The cost per unit of Product B under activity-based costing is closest to which of the following?

Eaker Company uses activity-based costing to compute product costs for external reports.The company has three activity cost pools and applies overhead using predetermined overhead rates for each activity cost pool.Estimated costs and activities for the current year are presented below for the three activity centres: Activity Centre Estimated Overhend Cost Expected Activity Batch setups \ 20,400 1,200 Material handling 52,800 2,400 General factory 78,000 2,600 Actual costs and activities for the current year were as follows: Activity Centre Actual Overhead Costs Expected Activity Batch setups \ 20,740 1,230 Material hardling 52,360 2,470 General factary 77,590 2,680 Required: a)How much total overhead was applied to products during the year? b)By how much was overhead overapplied or underapplied? (Be sure to clearly label your Answer as to whether the overhead was overapplied or underapplied for each activity centre as well as for the total.)

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 overhead cost per unit of Product A is closest to which of the following?

Abel Company uses activity-based costing. The company has two products: A and B. The annual production and sales of Product A is 200 units and of Product B is 400 units. There are three activity cost pools, 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 \ 16,660 600 100 700 Activity 2 18,450 1,100 700 1,800 Activity 3 9,731 60 160 220 -The cost per unit of Product B is closest to which of the following?

Organization-sustaining activities are carried out regardless of how many units are made,how many batches are run,or how many different products are made.

Goel Company,a wholesale distributor,uses activity-based costing for its overhead costs.The company has provided the following data concerning its annual overhead costs and its activity-based costing system: Overhead Costs: Wages and salaries \ 460,000 Non-wage experises \ 20,000 Total \ 580,000 Distribution of Resource Consumption: $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$ $\quad$$\text { Activity Cost Pools }$ Filling Orders Product Support Other Total Wages and salaries 15\% 75\% 10\% 100\% Non-wage expenses 10\% 70\% 20\% 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 Filling orders 4,000 orders Product support 30 products Other Not applicable Required: Compute the activity rates (i.e.,cost per unit of activity)for the Filling Orders and Product Support activity cost pools by filling in the table below: Answer: Filling Orders Product Support Wages and salaries Non-wage experses Total

In the second-stage allocation in activity-based costing,activity rates are used to apply costs to products,customers,and other cost objects.

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.) - The overhead cost per unit of Product B under the activity-based costing system is closest to: (Do not round intermediate calculations)

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,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?