Exam 5: Activity-Based Costing and Management

Use the information below to answer the following question(s).Bill Cobb Corporation had the following activities, pooled costs, and physical flow of driver units.The company uses activity-based costing. The above activities are used by departments X and Y as follows: -Babcock Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs.The company has two departments: Assembly and Sanding.The Assembly Department uses a departmental overhead rate of $20 per machine hour, while the Sanding Department uses a departmental overhead rate of $15 per direct labour hour.Job 396 used the following direct labour hours and machine hours in the two departments: The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 396 is $1,200.What was the total cost of Job 396 if Babcock Industries used the departmental overhead rates to allocate manufacturing overhead?

Rogers Printing Ltd.has contracts to complete weekly supplements required by its' customers.For the current year, manufacturing overhead cost estimates total $580,000 for an annual production capacity of 14,500,000 pages.Rogers Printing decided to evaluate the use of additional cost pools.After analyzing manufacturing overhead costs, it was determined that number of design changes, setups, and inspections are the primary manufacturing overhead cost drivers.The following information was gathered during the analysis: Two customers, Jackson Sports and Beaufort Travel, are expected to use the following printing services: Pages are a direct cost at $0.02 per page.Design costs per job average $1,500 and $1,700 for Jackson Sports and Beaufort Travel, respectively.Rogers Printing sets prices at $0.11 per page plus 120% of design costs.Assume that all costs are variable.Required: Prepare income statements in contribution margin format for both customers using: a.Traditional (simple)costing with overhead applied on a page capacity basis b.Activity-based costing c.How much a page should Jackson Sports be charged if Rogers Printing wants to breakeven on this customer? Assume that manufacturing overhead costs are fixed and that they are allocated to customers based on pages sold as a percentage of production capacity; and, that design costs are also fixed.

Using a broad average to assign costs to products or services may lead to undercosting or overcosting.

An ABC system results in a better measure of the nonuniformity of a company's resources by jobs, products, or services than by using broad averages to assign costs.

Use the information below to answer the following question(s).Bill Cobb Corporation had the following activities, pooled costs, and physical flow of driver units.The company uses activity-based costing. The above activities are used by departments X and Y as follows: -Leonard Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs.The company has two departments: Building and Inspection.The Building Department uses a departmental overhead rate of $18 per machine hour, while the Inspection Department uses a departmental overhead rate of $15 per direct labour hour.Job 611 used the following direct labour hours and machine hours in the two departments: The cost for direct labour is $25 per direct labour hour and the cost of the direct materials used by Job 611 is $1,500.What was the total cost of Job 611 if Leonard Industries used the departmental overhead rates to allocate manufacturing overhead?

Provided a single allocation base is used, jobs are typically overcosted if

Product-cost cross-subsidization means that if a company undercosts one of its products, it will gain market share due to a more competitive price.

Product-sustaining (service-sustaining)costs are the costs of resources sacrificed on activities undertaken to support specific services.

The new manager of the insurance division does not understand how the company can have so many overhead rates for assigning costs to the activities of the company's life insurance underwriters.There is one rate schedule for average assignable costs when agents write standard policies.There is another rate schedule which the agents must complete when they write special policies, and these policies are costed out differently from those that are categorized as standard policies.Required: a.Why might the company have different costing systems with different overhead rates for the standard and specialized policies?

A cost accounting system should be revised when

The benefits of adopting ABC/ABM are higher for companies in competitive markets because

Eastern Star Nursing Home has been using an indirect overhead job cost system for allocating general and nursing overhead charges to all patients.However, during the past few months the facility has been losing patients because a competing nursing home charges much less for some classes of patients.It seems that Eastern Star is keeping the well patients and losing those who require special attention.The facilities manager believes that a refined costing system can improve the allocation of charges to all patients.Hopefully this will reduce the charges to the more ill patients.The accounting staff provided information for September.The costs have traditionally been allocated to patients based on nursing days.However, the accounting staff can separate nursing days by nursing category.At the request of the facilities manager, the following information was furnished concerning nursing days. Hazel Jones, a long-time patient, spent 5 days in Critical Care, 4 days in Special Care, and 21 days in General Care during September.Her monthly assignment of nursing days was: 2 for Senior RN, 6 for RN, 10 for PN, and 12 for Nurse's aide.Required: a.Determine the amount of cost to be covered by Hazel Jones if the daily pay rates presented in the table are used for staff services and overhead is added on a care area per day basis. b.For each patient care area determine the total cost per day to be charged to patients using the weighted average staff services cost for the daily pay rate portion of total costs.What is cost to be covered by Hazel Jones' charge for the month of September?

Summer Daze Corporation manufactures two products, Bocce Ball Sets and Croquet Sets.Croquet Sets were added as a product line two years ago.Croquet Sets are the more complex of the two products, requiring one hour of direct labour time per unit to manufacture, compared to one-half hours of direct labour time for Bocce Ball Set.Croquet Sets are produced on an automated production line.Indirect costs are currently allocated to the products on the basis of direct labour hours.The company estimated it would incur $332,500 in manufacturing overhead costs and produce 6,000 units of Croquet Sets and 20,000 units of Bocce Ball Sets during the current year.Unit costs for materials and direct labour are: Indirect costs are: Activity cost pools/drivers: Required: a.Determine the unit cost of a Bocce Ball Set using traditional (simple)costing with units as the allocation base. b.Determine the unit cost of a Bocce Ball Set using activity-based costing.

What is activity-based management and how can it be used to improve the profitability of a company?

Norwegian Furniture Manufacturing makes two models of office chairs: regular and deluxe.Summary data for the two products showed the following: * Under the company's current costing, manufacturing overhead is allocated on the basis of direct labour-hours.The overhead for the year follows: The following table presents the activity levels that relate to the overhead costs: The market price for the regular chairs is $ 104 with expected sales of 40,000 units.The company expects to sell 25,000 deluxe chairs at a selling price of $170 per unit.Required: Determine the unit gross profit for the regular chair using both traditional and activity-based costing methods.

Indications that a product cost system needs revision include

Activity-based costing is a technique to improve the reliability of cost assignment

In the monthly management meeting, each manager was asked to come up with suggestions for controlling costs.Some managers favoured a simple across-the-board cut in expenditures, with every department accepting the same percentage reduction in their budget.This was supported by several managers as the fairest means to save costs.Your assistant attended the meeting in your absence and suggested that the company consider switching to activity-based costing.Unfortunately, the more he explained, the less support he received, particularly when he mentioned that more information would have to be collected, there would be implementation costs, and that what really mattered were nonfinancial variables, called activities.The meeting ended with everyone wondering how such an idea could lead to cost savings.Required:Explain how an ABC system should be able to save money, even though it focuses on activities, rather than just costs.Compare your assistant's suggestion to an across-the-board cut as a means to save money.

Use the information below to answer the following question(s).Bill Cobb Corporation had the following activities, pooled costs, and physical flow of driver units.The company uses activity-based costing. The above activities are used by departments X and Y as follows: -JenPar Industries uses departmental overhead rates to allocate its manufacturing overhead to jobs.The company has two departments: Building and Inspection.The Building Department uses a departmental overhead rate of $18 per machine hour, while the Inspection Department uses a departmental overhead rate of $15 per direct labour hour.Job 611 used the following direct labour hours and machine hours in the two departments: The cost for direct labour is $23 per direct labour hour and the cost of the direct materials used by Job 611 is $1,300.What was the total cost of Job 611 if JenPar Industries used the departmental overhead rates to allocate manufacturing overhead?

Use the information below to answer the following question(s).A transportation company provides bussing, limo and taxi service.The company charges: $350 per day for bussing service; $2.00 per kilometre for taxi service; and, $3.50 per kilometre for limo service.Two individual clients, the school board and the city government offices use the majority of the limo service on a contract agreement.Bussing services are used exclusively by the school board, and the taxi service is used almost exclusively by the general public, although the school board uses the taxi services when individual students have to be transported on occasion.Indirect costs are accumulated on internal records at $1.50 per kilometre for limo use and $1.00 per kilometre for taxi use, and $195 per day for each of the twenty buses.The company's costing system has tracked the following activities for the month: -What indirect costs were accumulated for each major client for the month?