Exam 27: Activity-Based Costing

Activity-based costing can be especially effective in situations where many different types of products are manufactured in the same department or departments.

Cleveland Company manufactures two products, Product A-33 and Product C-17. Product C-17 is the more complex of the two products, requiring 1.5 hours of direct labor per unit to manufacture compared to 1.0 hour of direct labor time for Product A-33. Product C-17 is produced on an automated production line. The company estimated it would incur $510,000 in manufacturing overhead costs and produce 10,000 units of Product C-17 and 40,000 units of Product A-33 during the current year. Unit costs for materials and labor are: Product A-33 Produet C-17 Direct material \ 13 \ 21 Direct labor \ 6 \ 9 Required: The company is considering the use of activity-based costing as an alternative to its current traditional costing method for manufacturing overhead. Data relating to the company's activity cost pools for the current year are given below: Activity cost pool Total cost Product A-33 Product C-17 Total Machine setups required \ 253,000 800 1,600 2,400 Purchase orders issued 72,500 500 100 600 Machine-hours required 7,000 10,500 17,500 Total \ 510,000 Using the data above, determine the unit product cost of Product A-33 for the current year.

Activity-based costing generally requires less effort to implement and maintain than a traditional cost system.

Winterland, Inc., produces two types of skis, downhill skis and cross country skis. Product and production information about the two items is shown below: Downhill skis Cross country skis Number of sets sold........... 75,000 125,000 Number of setups............. 200 50 Total direct labor hours...... 150,000 hours 250,000 hours Direct labor hours per unit.. 2 hours 2 hours Total machine hours............... 25,000 hours 100,000 hours Machine hours per unit...... 0.333 hours 0.08 hours $\text { Indirect costs consist of the following: }$ Depreciation of factory equipment. \ 2,000,000 Setup costs. 1,500,000 Miscellaneous indirect costs..... 1,000,000 Total... \ 4,500,000 Required: 1. If Winterland uses the traditional method of allocating overhead costs based on direct labor hours, what is the amount of indirect costs per set of skis for each of the two types of skis? 2. If Winterland uses activity based costing, what is the total amount of indirect costs per set of skis for each of the two types of skis? Assume that depreciation is allocated based on machine hours, setup costs based on the number of setups, and miscellaneous costs based on the number of direct labor hours.

An activity ________ is a temporary account accumulating the costs a company incurs to support an identified set of activities.

Quantum Corporation has provided the following data from its activity-based costing system: Activity Cost Pool Overhead Cost Total Activity Assembly \ 1,114,920 57,000 machine hours Processing orders \ 47,016 1,800 orders Inspection \ 107,328 1,560 inspection hours The company makes 430 units of product R32E a year, requiring a total of 1,120 machine-hours, 40 orders, and 30 inspection-hours per year. The product's direct materials cost is $49.81 per unit and its direct labor cost is $12.34 per unit. The product sells for $129.90 per unit. - According to the activity-based costing system, the total cost for producing the 340 units of the J71B product is:

The Homer Corporation produces two products, and reports the following production and cost information for the most recent accounting period. - Using direct labor hours as the basis for assigning overhead costs, the total product cost per unit for Product B is:

Naples Corporation has provided the following data from its activity-based costing accounting system: Indirect factory wages \ 520,000 Factory equipment depreciation \ 260,000 Activity Cost Pools Activity Rate Processing customer orders \ 92.86 per customer order Assembling products \ 1.78 per assembly hour Setting up batches \ 52.09 per batch - The "Other" activity cost pool consists of the costs of idle capacity and organization-sustaining costs that are not assigned to products. How much indirect factory wages and factory equipment depreciation cost would be assigned to the Customer Orders activity cost pool?

Portofino Corporation uses the following activity rates from its activity-based costing to assign overhead costs to products: Activity Cost Pools Activity Rate Setting up batches \ 79.50 per batch Processing customer orders \ 71.31 per customer order Assembling products \ 7.06 per assembly hour $\text { Data concerning two products appear below: }$ Product KJ22 Product KL 37 Number of batches 69 12 Number of customer orders 20 9 Number of assembly orders 492 697 - How much overhead cost would be assigned to Product KL37 using the activity-based costing System?

Activity-based costing uses pre-determined overhead rates to allocate costs.