Exam 4: Activity Based Costing

Pittinger Company manufactures cuckoo clocks and uses an activity-based costing system to allocate all manufacturing conversion costs.Each cuckoo clock consists of 10 separate parts totaling $120 in direct materials,and requires 2.0 hours of machine time to produce.Additional information follows: What is the cost of machining per cuckoo clock?

Waste activities is another name for value-added activities.

Pittinger Company manufactures cuckoo clocks and uses an activity-based costing system to allocate all manufacturing conversion costs.Each cuckoo clock consists of 10 separate parts totaling $120 in direct materials,and requires 2.0 hours of machine time to produce.Additional information follows: What is the cost of assembling per cuckoo clock?

Martin Corporation manufactures two products-Plows and Harrows.The annual production and sales of Plows is 1,000 units,while 2,000 units of Harrows are produced and sold.The company has traditionally used direct labour hours to allocate its overhead to products.Plows require 5.0 direct labour hours per unit,while Harrows require 2.0 direct labour hours per unit.The total estimated overhead for the period is $603,500.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 predetermined overhead allocation rate using the traditional costing system would be closest to

Sparrow Manufacturing manufactures small parts and uses an activity-based costing system. The following parts were produced in October with the following information: Total manufacturing costs for part A is

Humber Products manufactures its products in two separate departments: milling and assembly.Total manufacturing overhead costs for the year are budgeted at $2 million.Of this amount Milling Department incurs $1,200,000 (primarily for machine operation and depreciation)while the Assembly Department incurs $800,000.Humber Products estimates that it will incur 8,000 machine hours (all in the Milling Department)and 25,000 direct labour hours (5,000 in the Milling Department and 20,000 in the Assembly Department)during the year. Humber Products currently uses a plant-wide overhead rate based on direct labour hours to allocate overhead.However,the company is considering refining its overhead allocation system by using departmental overhead rates.The Milling Department would allocate its overhead using machine hours (MH),but the Assembly Department would allocate its overhead using direct labour (DL)hours. The following chart shows the machine hours (MH)and direct labour (DL)hours incurred by Jobs 600 and 601 in each production department: Both Jobs 600 and 601 used $2,000 of direct materials.Wages and benefits total $25 per direct labour hour.Humber Products prices its products at 110% of total manufacturing costs. Required: 1.Compute Humber Products' current plant-wide overhead rate. 2.Compute refined departmental overhead rates. 3.Compute the total amount of overhead allocated to each job if Humber Products uses its current plant-wide overhead rate. 4.Compute the total amount of overhead allocated to each job if Humber Products uses departmental overhead rates. 5.Do both allocation systems accurately reflect the resources that each job used? Explain. 6.Compute the total manufacturing cost and sales price of each job using Humber Products' current plant-wide overhead rate. 7.Compute the total manufacturing cost and sales price of each job using Humber Products' refined departmental overhead rates. 8.Based on the current (plant-wide)allocation system,how much profit did Humber Products think it earned on each job? 9.Based on the departmental overhead rates and the sales price determined in Requirement 7,how much profit did it really earn on each job?

Cost distortion occurs when some products are over costed while other products are undercoated by the cost allocation system.

With increased competition,managers need more accurate estimates of product costs in order to set prices and to identify the most profitable products.

ABC costing is generally more accurate than traditional cost systems.

Haas Corporation,a manufacturer of a variety of products,uses an activity-based costing system.Information from its system for the year for all products follows: Haas Corporation makes 300 of its product A92 a year,which requires a total of 48 machine hours,10 inspection hours,and 14 orders.Product A92 requires $51.40 in direct materials per unit and $62.80 in direct labour per unit.Product A92 sells for $140 per unit.What is the product margin in total for Product A92?

Product-level activities and costs are incurred for a particular product,regardless of the number of units or batches of the product produced.

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. Which product line(s)have been over costed or under costed by using the plant-wide manufacturing overhead rate?

Unit-level activities and costs are incurred once for every batch.

In using an ABC system,which of the following steps is NOT performed before the company's year begins?

To determine the amount of overhead allocated,the overhead rate is divided by the cost driver.

Sparrow Manufacturing manufactures small parts and uses an activity-based costing system. The following parts were produced in October with the following information: Total packaging costs for all three parts is

Louis Corporation,which uses an activity-based costing system,produces travel trailers and boat trailers.The company allocates batch setup costs to the two products using the following basic data: Total budgeted setup costs for the year are $140,000. If the setup costs are allocated using number of setups,how much of the total setup costs would be allocated to boat trailers?

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 predetermined overhead allocation rate using the traditional costing system would be closest to:

Martin Corporation manufactures two products-Plows and Harrows.The annual production and sales of Plows is 1,000 units,while 2,000 units of Harrows are produced and sold.The company has traditionally used direct labour hours to allocate its overhead to products.Plows require 5.0 direct labour hours per unit,while Harrows require 2.0 direct labour hours per unit.The total estimated overhead for the period is $603,500.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 Harrow using an activity-based costing system would be closest to

Credit Valley Products manufactures its products in two separate departments: milling and assembly.Total manufacturing overhead costs for the year are budgeted at $1,600,000.Of this amount Milling Department incurs $960,000 (primarily for machine operation and depreciation)while the Assembly Department incurs $640,000.Credit Valley Products estimates that it will incur 8,000 machines hours (all in the Milling Department)and 25,000 direct labour hours (5,000 in the Milling Department and 20,000 in the Assembly Department)during the year. Credit Valley Products currently uses a plant-wide overhead rate based on direct labour hours to allocate overhead.However,the company is considering refining its overhead allocation system by using departmental overhead rates.The Milling Department would allocate its overhead using machine hours (MH),but the Assembly Department would allocate its overhead using direct labour (DL)hours. The following chart shows the machine hours (MH)and direct labour (DL)hours incurred by Jobs 400 and 401 in each production department: Both Jobs 400 and 401 used $4,000 of direct materials.Wages and benefits total $35 per direct labour hour.Credit Valley Products prices its products at 120% of total manufacturing costs. Required: 1.Compute Credit Valley Products' current plant-wide overhead rate. 2.Compute refined departmental overhead rates. 3.Compute the total amount of overhead allocated to each job if Credit Valley Products uses its current plant-wide overhead rate. 4.Compute the total amount of overhead allocated to each job if Credit Valley Products uses departmental overhead rates. 5.Do both allocation systems accurately reflect the resources that each job used? Explain. 6.Compute the total manufacturing cost and sales price of each job using Credit Valley Products' current plant-wide overhead rate. 7.Compute the total manufacturing cost and sales price of each job using Credit Valley Products' refined departmental overhead rates 8.Based on the current (plant-wide)allocation system,how much profit did Credit Valley Products think it earned on each job? 9.Based on the departmental overhead rates and the sales price determined in Requirement 7,how much profit did it really earn on each job?