Exam 4: Activity Based Costing

The benefits of ABC/ABM are higher when the risks of cost distortion is high.

Clearview Display Company manufactures display cases to be sold to retail stores.The cases come in three sizes-Large,Medium,and Small.Currently,Clearview Display Company uses a single plant-wide overhead rate to allocate its $7,141,100 of annual manufacturing overhead.Of this amount,$1,875,000 is associated with the Large Case line,$2,992,500 is associated with the Medium Case line,and $2,273,600 is associated with the Small Case line.Clearview Display Company is currently running a total of 37,000 machine hours: 12,500 in the Large Case line,13,300 in the Medium Case line,and 11,200 in the Small Case line.Clearview Display Company uses machine hours as the cost driver for manufacturing overhead costs. Required: a.Calculate the plant-wide manufacturing overhead rate. b.Calculate the departmental overhead rate for each of the three departments listed. c.Which product line(s)have been over costed by using the plant-wide manufacturing overhead rate? By how much per machine hour? Which product line(s)have been under costed by using the plant-wide manufacturing overhead rate? By how much per machine hour?

Step-Up Corporation manufactures two small step ladders,Regular and Deluxe.Deluxe ladders were added as a product line three years ago.Deluxe ladders are the more complex of the two products as they are extendable,requiring one hour of direct labour time per unit to manufacture,compared to one-half hours of direct labour time for Regular ladder. 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 Deluxe ladders and 20,000 units of Regular ladders during the current year. Unit costs for materials and direct labour are: Indirect costs are: Required: a.Determine the unit cost of the two products using traditional costing with units as the allocation base. b.Determine the unit cost of the two products using activity-based costing.

Hinckley & Granger Company had the following activities,estimated indirect activity costs,and allocation bases: Hinckley & Granger uses activity-based costing. The above activities are used by Departments P and Q as follows: What is the cost per driver unit for the account billing activity?

Bond 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 542 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 542 is $1,200. What was the total cost of Job 542 if Bond Industries used the departmental overhead rates to allocate manufacturing overhead?

Silver Company manufactures several different products and uses an activity-based costing system.Information from its system for the year for all products follows: The annual production and sales of one of its products,the Zinger,are 1,000 units.The following data relate to the production and sales of Zingers in the most recent year: What is the average cost of one Zinger?

Facility-level activities and costs are incurred no matter how many units,batches,or products are produced in the plant.

Jason Corporation uses activity-based costing.The company produces two products: Snaps and Pops.The expected annual production of Snaps is 1,000 units,while the expected annual production of Pops is 3,000 units.There are three activity cost pools: Assembly,Testing,and Packing.The estimated costs and activities for each of these three activity pools follows: The overhead cost per unit of Pops would be closest to

Two main benefits of ABC are (1)more accurate product cost information and (2)more detailed information on the costs of activities and the drivers of those costs.

Traditions Home Accessories Company manufactures pillows using an activity-based costing system to allocate all manufacturing conversion costs.The following information is provided for the month of June: Each pillow consists of 3 parts;the total direct materials cost per pillow is $8.00. What is the total cost of materials handling and assembling for each pillow?

It is easier to allocate indirect costs to the products that caused those costs if you use the ABC system rather than traditional costing systems.

Green Bags Company manufactures cloth grocery bags to be sold to grocery stores and other retailers.Green Bags Company sells the bags in cases of 1,000 bags.The bags come in three sizes: Large,Medium,and Small.Currently,Green Bags Company uses a single plant-wide overhead rate to allocate its $7,141,100 of annual manufacturing overhead.Of this amount,$1,875,000 is associated with the Large Bag line,$2,992,500 is associated with the Medium Bag line,and $2,273,600 is associated with the Small Bag line.Green Bags Company is currently running a total of 37,000 machine hours: 12,500 in the Large Bag line,13,300 in the Medium Bag line,and 11,200 in the Small Bag line.Green Bags Company uses machine hours as the cost driver for manufacturing overhead costs. The departmental manufacturing overhead rate for the Small Bag line would be closest to

Menno Corporation manufactures two products-Tables and Chairs.The annual production and sales of Tables is 2,000 units,while 8,000 units of Chairs are produced and sold.The company has traditionally used direct labour hours to allocate its overhead to products.Tables require 1.0 direct labour hours per unit,while Chairs require 0.5 direct labour hours per unit.The total estimated overhead for the period is $235,000.The company is looking at the possibility of changing to an activity-based costing system for its products.If the company used an activity-based costing system,it would have the following three activity cost pools: The overhead cost per Table using an activity-based costing system would be closest to

Which of the following is MOST likely to be the cost driver for the packaging and shipping activity?

Value-engineering is accomplished by eliminating,reducing,or simplifying all non-value added activities,and examining whether value-added activities could be improved.

Refined costing systems can only be used by manufacturers to allocate manufacturing overhead.

Dudley & Spahr,Attorneys at Law,provide a variety of legal services.The law firm uses an activity-based costing system and has developed the following activity pool cost rates: Cost and activity data related to two clients is as follows: How much overhead cost would be allocated to Client 103 using the activity-based costing system?

Merchandising and service companies,as well as governmental agencies,can use refined cost allocation systems to provide their managers with better cost information.

Sector's Machine Works manufactures custom equipment.Sector's Machine Works currently uses a plant-wide overhead rate,based on direct labour hours,to allocate its $2,000,000 of manufacturing overhead to individual jobs. Sector's plant completed Jobs 550 and 555 on May 15.Both jobs incurred a total of 7 DL hours throughout the entire production process.Job 550 incurred 3 MH in the Machining Department and 6 DL hours in the Assembly Department (the other DL hour occurred in the Machining Department).Job 555 incurred 4 MH in the Machining Department and 5 DL hours in the Assembly Department (the other two DL hours occurred in the Machining Department). Requirements 1.Compute the plant-wide overhead rate,assuming Garvey expects to incur 40,000 total DL hours during the year. 2.How much manufacturing overhead would be allocated to each job if Sector uses the plant wide rate?

Plant-wide overhead rates typically do a better job of matching each department's overhead costs to the products that use the department's resources than do departmental overhead rates.